Riot Blockchain Inc. (NASDAQ:RIOT) shares declined by more than 5% on Friday, extending the losses of the last two weeks. The stock has plunged more than 20% since Nov. 12, dragging the net year-to-date gain down to 113%.
Riot Blockchain is a cryptocurrency mining company whose operations are based in North America. It is one of the few corporate bitcoin miners that focuses on using renewable energy solutions, and according to industry experts, moving towards environmentally friendly mining solutions may also come with added benefits like lower costs associated with power consumption.
With the ever-expanding emphasis on ESG investing, bitcoin miners that exclusively mine using renewables have the greatest upside in my opinion. RIOT made headlines for missing earnings, but that stock is still up ~15x in a one year period. Clearly, the appetite for exposure to the asset class is there. RIOT relies on the inexpensive hydroelectric power in upstate New York with a 300-megawatt facility and running nearly all Bitmain S19 miners, this is a winning combination with more upside, said Stephen Gregory, the U.S. Regional Chief Executive of currency.com.
The companys fiscal Q3 mining revenue jumped 2,099% from the same quarter a year ago to $53.6 million with a gross margin of 76%, up from 47% in 2020. Total revenue came in at $64.8 million, reflecting a year-over-year increase of 2,532%. Naturally, Riot attributed the improvement in revenue and mining revenue margin to the rising price of bitcoin during the quarter. Therefore, with the price of the pioneer cryptocurrency pulling back below $58,000 in recent trading sessions after topping $68,500, Riot Blockchains fiscal Q4 results are almost certain to be affected, thus adding pressure to the stock price.
Valuation and growth
From a valuation perspective, Riot Blockchain shares trade at a steep trailing 12-month price-earnings ratio of 165.52, making the stock a less attractive option for value investors. However, its forward price-earnings ratio of 20.30 could gain the interest of some investors when you factor in Riots forecast earnings growth. Keep in mind that earnings will be directly tied to the price of bitcoin regardless.
Analysts expect Riot's earnings per share to rise by more than 70% this year, before increasing by a further 75.79% next year. In the long term, they expect Riot Blockchains bottom line to improve at an average annual rate of about 20% over the next five years. Therefore, the stock could be an exciting option for growth investors who are bullish on cryptocurrency and believe in its long-term viability.
Investors could also watch out for periodic rebounds in the price of bitcoin to determine when to buy or sell Riot Blockchain shares. The bitcoin price has demonstrated over the years that a significant pullback is often followed by a major rebound. High volatility stocks carry high risks, but the rewards can be significant if you get the timing right.
In summary, although Riot Blockchain shares have recently pulled back more than 16%, the stock has still more than doubled this year. In addition, although analysts expect its bottom line to improve significantly over the next few years, its current price-earnings ratio suggests it could be massive overvalued.
Given the unpredictable movement of the bitcoin price, it may be best to monitor the companys performance in the next quarter, rather than buying the stock in anticipation of a rebound in the bitcoin price. For those looking out for a good entry point to hold on for the long-term, now might not be the best time.
This article first appeared on GuruFocus.