Leveraging Corsicana And Rockdale Facilities Will Open AI/HPC Opportunities

Key Takeaways

• Strategic focus on AI/HPC and increased Bitcoin mining capacity may enhance revenue predictability and improve net margins.
  
• Acquisition and financial maneuvers aim to boost Bitcoin holdings and engineering segment revenues, enhancing asset value and operational efficiency.
  
• Riot Platforms faces financial challenges from Bitcoin market volatility, high capital expenditure, growing competition, and potential liquidity constraints affecting revenue and cash flow stability.

Catalysts

A Bitcoin mining company in the United States.

• Riot Platforms is focusing on increasing its Bitcoin mining hash rate by approximately 22% in 2025, which could lead to higher revenues from Bitcoin mining operations as the company expands its mining capacity.
  
• There's a strategic shift towards AI/HPC opportunities, capitalizing on large-scale power assets like the Corsicana and Rockdale facilities. This pivot could drive long-term predictable revenue streams from AI/HPC contracts, potentially enhancing net margins due to more stable cash flows.
  
• Riot's decision to stop selling mined Bitcoin and focus on Bitcoin yield, alongside strategic Bitcoin purchases, enhances its Bitcoin holdings. As Bitcoin prices increase, this strategy could lead to significant asset value appreciation, positively impacting earnings.
  
• The acquisition of E4A Solutions is expected to boost the engineering segment's revenues by integrating higher-margin services. This acquisition is poised to add recurring revenues, which could improve overall net margins through greater operational efficiencies.
  
• Riot's convertible senior notes offering has improved its cost of capital and expanded its investor base. By using these proceeds to acquire Bitcoin, the company is enhancing its Bitcoin yield per share, potentially driving up earnings as Bitcoin appreciates in value.

Riot Platforms Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Riot Platforms's revenue will grow by 28.7% annually over the next 3 years.
• Analysts are not forecasting that Riot Platforms will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Riot Platforms's profit margin will increase from -86.9% to the average US Software industry of 13.3% in 3 years.
• If Riot Platforms's profit margin were to converge on the industry average, you could expect earnings to reach $129.9 million (and earnings per share of $0.3) by about July 2028, up from $-398.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 74.0x on those 2028 earnings, up from -12.2x today. This future PE is greater than the current PE for the US Software industry at 46.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Riot Platforms Future Earnings Per Share Growth

Risks

• The Bitcoin yield strategy involves retaining mined Bitcoin, which could expose Riot Platforms to significant fluctuations in Bitcoin's market value, potentially impacting net income and earnings.
  
• Riot's focus on increasing hash rate necessitates substantial capital expenditures, which could strain cash flow and affect profit margins if Bitcoin prices do not remain favorable.
  
• Increased competition from hyperscalers and AI demands may challenge Riot's operational focus and investment allocation, possibly affecting future revenue streams if not balanced effectively.
  
• The cessation of Bitcoin sales and the decision to accumulate Bitcoin reserves could lead to liquidity constraints, influencing Riot's ability to fund new projects or manage operational costs.
  
• The conversion of mining power assets for AI/HPC usage involves exposure to new industry dynamics and reliance on successful negotiations with hyperscalers, presenting risks to consistent revenue generation and profit margins.

Valuation

• The analysts have a consensus price target of $17.367 for Riot Platforms based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $977.2 million, earnings will come to $129.9 million, and it would be trading on a PE ratio of 74.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of $13.6, the analyst price target of $17.37 is 21.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.