Summary Marathon Digital shares continue their ascent despite an ugly loss in Q4. Bitcoin production increases sharply. Strong potential for this to continue going forward. The higher the stock goes here (without accompanying profitability), the greater the risk. We continue to watch two trends discussed below to ascertain how high MARA shares will trade going forward. Intro We wrote about Marathon Digital Holdings, Inc. ( MARA ) back in late January of this year when we recommended selling call ratio spreads or indeed broken wing butterflies. These options strategies really work well when stocks are undergoing trending moves and rich option skew is evident as the probability of profit comes in well over 75% in many cases. In fact, given the 40%+ short interest ratio at the time, we favored the broken-wing butterfly strategy to minimize upside risk in this play (Short-Squeeze Possibility). Short-term upside potential was the reason for this strategy and although we had to wait some time for the up move to materialize, shares finally rallied and currently find themselves 11%+ above the share price when we initiated the position. In fact, March has been an excellent month for the stock thus far compounded by the gains post the announcement of the company's fourth-quarter earnings results . Although the financial performance of Marathon was poor in the fourth quarter with respect to the sizable net loss, the rising price of Bitcoin continues to raise all boats with Marathon Digital being no exception. In fact, given the company's encouraging operating performance in the fourth quarter, speculators continue to view MARA as an attractive leveraged play on Bitcoin. As alluded to above, the reasons behind this are operational and not financial. To this effect, Marathon actually increased its Bitcoin production in fiscal 2022 by 30% with Q4 production ending up being a record quarterly number. This growth essentially stemmed from Marathon's shift to renewable power and the ability to lock in more favorable hosting contracts. Suffice it to say, with these levels of production numbers, speculators continue to gain some significant leverage to the upside. Nevertheless, leverage as we know is a double-edged sword which means that long-term investors need to be mindful of the following areas to ensure downside risk can be kept to a minimum in this play. Marathon Digital Technicals (Stockcharts.com) Marathon Digital's Profitability When it comes down to it, the best way to defend against a volatile Bitcoin price (and associated risk to the downside) is to improve the company's financial metrics. Although the company continued to burn cash at an elevated rate in fiscal 2022 (which resulted in more share dilution in Q4), management had to deal with fiscal 2022 headwinds such as Hardin 's associated costs, Compute North 's liquidation plus the well-publicized FTX (FTT-USD) crypto exchange bankruptcy. This led to Marathon's decision to shore up the balance sheet which makes sense for the following reason. For Marathon to execute on the potential it has, it needs to have sufficient solvency as well as ample liquidity irrespective of the losses it may need to continue to report over the near term. The company's objective of scaling the firm into a significant international Bitcoin miner is a real possibility given the size of the mining fleet and the rate at which the hash rate has been increasing. Suffice it to say, in an environment of growing energized miners alongside much-improved optimization, profitability should over time take care of itself. MARA Stock Valuation The problem though is that if profitability does not rebound and shares keep on trending higher. At present, for example, Marathon's forward price-to-sales ratio comes in at 3.36 which is based on almost 250% growth in the company's sales in this coming year (fiscal 2023). Despite the growth rate, Marathon's forward sales multiple still comes in roughly 30% higher than what the sector's sales are trading at (2.59). A few trends investors need to watch out for here: Marathon's fiscal top-line sales target of roughly $407 million has lost approximately 6% over the past thirty days as we can see below. Remember, Marathon Digital's share-price action is predicated on growing sales as the market (at present) expects this robust sales growth to convert to strong profit growth over time. Sales growth remains the principal driver of Marathon's valuation so long-term investors would do well in monitoring forward-looking sales expectations. Forward sales are expensive for a reason so if growth were to come to a grinding halt, the sales multiple, as well as the share price, would most likely fall as a result. Marathon Digital: Forward-Looking Sales Estimates (Seeking Alpha) Although top-line growth rates in Marathon easily surpass the industry, the company's gross margin of 38.2% still trails the sector by a significant margin (sector median of 50.17%). In an environment of rising costs, any significant uptick in this crucial profitability metric will essentially protect the income statement which is what the market wants to see. Enhanced efficiency & effectiveness is what management is looking for in fiscal 2023 so it will be interesting to see if better optimization can come to pass this year. Conclusion To sum up, despite the fact that Marathon Digital posted a sizable net loss in Q4 as well as in fiscal 2022, shares actually rallied on the news as investors opted to focus on what is coming down the track here. Bitcoin production increased significantly over the past two quarters and this trend is expected to accelerate throughout fiscal 2023. We will continue to monitor valuation & profitability trends closely. We look forward to continued coverage.
