What Makes Riot Platforms Tick? ⛏️💎

In this analysis by Chuck Saletta, a respected contributor at Motley Fool, the spotlight is on Riot Platforms (RIOT), a Bitcoin miner that’s about to see a major expansion come online.

Riot Platforms (NASDAQ: RIOT) strives to be the world’s leading infrastructure business for the cryptocurrency Bitcoin. In essence, the company makes its money by first mining and then selling Bitcoin.

Bitcoin mining requires a lot of computing power, and computing power takes up a bunch of space and electricity. As a result, Riot Platforms runs its business via two large-scale data centers in Texas, with its second one just now getting started on the act of ramping up production. 

Texas tends to have below-average costs for electricity. In addition, as a large user of electricity, Riot Platforms has the ability to lower its costs further, through things like managed demand programs. Those programs let the energy grid scale back Riot Platforms’ usage at times when overall electric demand is high, providing credit back to Riot Platforms for that ability and the cutback itself.

While the reduction in electricity usage does translate directly to a reduction in Riot Platforms’ ability to mine new Bitcoins, it also provides a decent amount of revenue to the company. In November 2023, for instance, Riot Platforms received about $1.8 million in value across power credits and demand response credits, thanks to those energy management programs.

What should prospective investors know?

First and foremost, prospective investors should recognize that Riot Platforms fortunes are tied directly to Bitcoin. For the company to profit, it has to be able to sell its Bitcoins for more than the total costs of running its business.

On that front, it still has a way to go. In its most recently reported quarter (through September, 2023), Riot Platforms did get $31.2 million in revenue directly from mining Bitcoin, vs. $24.4 million in direct mining expenses.

Unfortunately, when you add in data center hosting ($26.1 million), engineering ($13.2 million), and selling, general, and administrative costs ($29.1 million), its total operating costs exceed its revenues.

The startup of its second datacenter should ultimately help on that front. After all, the second facility’s startup costs have largely been incurred without it generating a dime in revenue. Once it operates at full capacity over the next two years, investors may be able to see positive returns on that investment.

Still, on that front, there is another key aspect of its operations that Riot Platforms investors should recognize. By design, Bitcoin goes through “halving” cycles about once every four years. In essence, the computational cost to generate a new Bitcoin doubles every time the currency halves. The next halving event is expected around April of 2024. 

The theory behind the halving cycles is that they help ensure the scarcity of Bitcoin, which should help protect the cryptocurrency’s value. If that holds true, then Riot Platforms may be able to generate more from mining new Bitcoins than its costs to mine them. If it doesn’t hold true, then Riot Platforms will find itself in a situation where its revenues could decline even as its expenses stay high.

Either way, the halving cycles do make it clear how important it is for Bitcoin miners like Riot Platforms to continue to invest in new computing power to mine future Bitcoins. 

Can Riot Platforms reach overall profitability?

Despite the fact that Riot Platforms is not yet profitable, it does have a fairly solid balance sheet. The company’s balance sheet shows $1.46 billion in assets, vs. only $0.11 billion in liabilities.  In addition, it claims its mining costs are down to $5,537 per Bitcoin -- which would be around $11,074 after the upcoming halving event. 

Compared with a recent price of $42,106 per Bitcoin, that provides decent reason to believe that Riot Platforms can find a path to profitability. Indeed, as its second datacenter reaches full capacity, analysts expect it can potentially be profitable by 2025. 

It all depends, of course, on where Bitcoin trades over time. The cryptocurrency’s value has varied between around $16,000 and $44,000 over the past year.  At or below the lower end of that range, it’s hard to see a path to where Riot Platforms can sustainably cover its total costs of operating, while at the higher end, that profitability may very well come to pass.

At the time of publication, Chuck Saletta did not own shares of any company or cryptocurrency mentioned in this article.

Sources: Riot Platforms, Investopedia, Save on Energy, Coin Telegraph, SEC, USA Today, Yahoo Finance, Statista

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