Unlocking Value in Bitcoin Mining - Analyst Selects RIOT And CLSK As Top Picks

Bernstein analyst Gautam Chhugani initiated coverage on U.S. Bitcoin miners with an Outperform rating on Riot Platforms, Inc RIOT (price target $15.6), Outperform on CleanSpark, Inc CLSK (price target $5.3) and a Market-Perform rating on Marathon Digital Holdings, Inc MARA (price target $8.3). 

Chhugani prefers RIOT and CleanSpark as market share consolidators with strong operational edge, low cost of production, high liquidity, and unlevered balance sheets. Marathon is the largest miner but with sub-par expenses and debt, no operational advantage. 

Riot and CLSK are counter-cyclically investing in Bitcoin self-mining capacity, unlike some miners who pivoted capacity to AI/high-performance computing. 

He notes this counter-cyclical BTC capacity to pay off - lock in mining ASIC chips at a low price today and sell Bitcoin mined at a high price as the cycle turns. 

Bitcoin price cycles have followed 4-year patterns in sync with Bitcoin halving - slashing Bitcoin miner rewards and new supply by half every 4 years. 

It is not a coincidence that a new BTC price cycle broke out in the last 3 halving years, i.e., 2012, 2016, and 2020, albeit with different demand catalysts in each process. 

The next halving is due in April 2024. For the 2024-27 cycle, the analyst expects Bitcoin to rise to a process high of $150,000 by mid-2025, implying a 1.5 times Bitcoin's marginal cost of production. 

Tactically, Chhugani expects BTC to rally into the ETF approvals and ETF initial response, some profit booking into halving in April 2024, and significant inflection post-halving once miner risks clear.

Chhugani projects FY23 revenue of $276.595 million for Riot (consensus $325.64 million), $347.108 million (consensus $372.98 million) for Marathon, and $170.601 million (consensus $171.43 million) for CleanSpark. 

The corresponding EPS estimates are $(0.57) (consensus $(0.97)), $(0.11) (consensus $(0.32)) and $(0.46) (consensus $(0.82)).

Price Action: RIOT shares traded higher by 0.78% at 9.69 on the last check Tuesday.