Marathon Digital: Earn A 21% Annualized Yield Betting On This Leading Bitcoin Miner

Summary Marathon Digital has transformed into an industry behemoth over the last few years, with over $1 billion in net assets and a massively expanded mining footprint. A high level of bitcoin exposure and consistent dilution make the stock a risky proposition at current prices. Selling put options on MARA stock appears optimal. Yielding a cash-on-cash return of 13.4% over the next 225 days, a trade like this could generate meaningful returns while baking in a huge margin of safety if assigned. A number of years ago, we published an article , which focused on Marathon Digital ( MARA ), and how we thought that selling put options on the stock was an attractive way to earn yield for those looking to maximize risk & reward in the crypto space. We touched on the company's plans to expand mining capacity, along with unit economics, growth plans, and the company's balance sheet to inform our trade idea, which involved selling put options at a 54% discount to where the stock was trading at the time. Fast forward to option expiry, and our trade idea was successful, earning investors a 7.3% cash-on-cash return over a relatively short timeframe of ~110 days. Today, Marathon has transformed its business considerably. What once was a growth-oriented bitcoin miner has transformed into an industry behemoth, with over $1.3 billion in assets on its balance sheet, and only ~$360 million or so in total liabilities. The company's hash rate has also exploded, and management continues to explore new ways to cut production costs, including plans to set up a new facility in Paraguay which will use waste power from a nearby dam to run operations. However, despite the differences between the company then and now, we actually think that the stock is poised for another successful trade that is highly similar to the one we initially called out several years ago. For those interested in getting involved in MARA, but at a better price and with a better risk/reward setup overall, selling put options may be a great option. Today, we'll explore what's new with MARA since 2021, and we'll outline our new trade idea that could yield more than 13% (annualized) over the coming year with a relatively small amount of risk. Sound good? Let's jump in. What's New When we left things off with MARA, the company was a bitcoin miner with 2.09 EH/s of hashing power, which by today's standards isn't much. However, over only a few short years later, operational hashing power now stands at 26.4 EH/s, which represents an unbelievable >10x increase: Company Website In addition to the massive expansion in hashing power, the company has significantly expanded its mining footprint to 11 facilities, which include owned and non-owned sites. Originally, MARA focused on deploying capital into higher return miners: Because Marathon is eschewing building the traditional infrastructure required for Bitcoin mining (they are renting the warehouses needed to run mining facilities), they have also been able to invest directly in the highest ROI assets - miners. As a result, Marathon has extremely high operating leverage to increases in the price of Bitcoin, as well as unbelievable ROIC. However, as time has gone on this asset-light approach has led to higher production costs than competitors like Riot ( RIOT ) and CleanSpark ( CLSK ) due to a lack of verticalization: Our first question comes from CK, who asked ... why do analysts still favor Riot and CleanSpark over Marathon after taking extreme steps to extinguish long-term debt in Q3? Fred? Fred Thiel Marathon still has more debt than our peers and we're transitioning our business model. Our reported cost per Bitcoin is also higher and we aim to close this gap in 2024. Also, as you look at our business, we believe that optimizing our costs through the benefit of some of the opportunities that will be available, post halving here, will enable us to continue to drive costs down significantly. In other words, MARA pursued a high growth & debt strategy as opposed to other companies which focused on wholistically building out their facilities. While this means that MARA has more hash power, it also means that their hash power is less efficient from a cost standpoint. Thankfully, management is keenly aware of this, and has taken steps to verticalize & reduce costs, which explains the company's recent acquisition of their original mining facilities from Generate Capital: Investor Presentation The company expects this acquisition to power strong financial results, and we think the projections presented to investors seem reasonable: Investor Presentation On their recent call, CEO Fred Thiel summed up this change in strategy when he said the following : When we first detailed our asset-light strategy in 2021, we believed investing in mining hardware over infrastructure was the most capital-efficient way to scale quickly. Today, we are proud to say that this strategy has worked as Marathon is now the leading public miner -- public Bitcoin miner in the US. In Q3, we mined 18% more Bitcoin and ended with 27% more hash rate than our closest competitor. This outstanding growth would not have been possible without our asset-light strategy. We estimate the company was able to invest 30% more capital in hash rate growth while our competitors were building infrastructure. Marathon has now entered a new phase, one that prioritizes both capital and operating efficiencies. Thus, as the business changes, MARA & its management are changing with it. We expect more of these types of transactions going forward that should be accretive from a financial standpoint & further optimize the business. One other accretive move from MARA was to significantly reduce its debt load for a huge discount : Also during the quarter, we took advantage of an opportunity to strengthen our balance sheet by exchanging $417 million in convertible notes for approximately $329 million in equity. This transaction reduced our debt by 56% and will save approximately $101 million or $0.55 per share in cash for our shareholders for principal and interest reduction. Between the facility acquisitions, the debt move, and management's recent comments, it's clear that MARA is transitioning from the fastest growing hash power miner to an industry stalwart, one that plans to continue to balance growth and profitability going forward. For our money, we believe that this could be a highly rewarding path for shareholders in the future. Additionally, right now, strong gross margins are marred by a very high level of D&A, which skews results: Seeking Alpha However, we believe that as the company balances growth and profitability together these depreciation & amortization costs should come down. This is mainly due to our view on the company's aggressive depreciation schedule of only 3 years for its active mining rigs, which seems conservative: 10Q Given that the majority of MARA's rig spend was concentrated in late 2021 and early/mid-2022, we think that the company's rigs will continue to be profitable to run well into 2025 and 2026: 10Q This is partially due to the fact that the halving could put less power-competitive miners out of business (and thus reduce block difficulty), and partially due to the fact that the company's miner inventory should continue to generate profits well into the future based on MARA's incredibly low $0.057 kw/h electricity cost: asicminervalue.com Thus, as these depreciation costs roll off, MARA's gross margins should skyrocket as these miners only represent a variable cost going forward, which presents serious upside in terms of earnings for shareholders. We expect both FCF and net income to increase significantly when this happens in stages over the coming 18 months. As fleet efficiency goes up due to new projects like the aforementioned Paraguay site, this should only improve further, especially given that each new project has its own WACC and should buttress results. Risks That said, there are some risks when it comes to MARA as a stock holding. First, the company holds 15,741 Bitcoin as of last count on its balance sheet, which represents a position of nearly $715 million, as of current BTC prices. This is a good chunk of MARA's market cap that's purely attributed to the company's BTC holdings. While not inherently negative, especially when prices are going up, it acts as a form of leverage when it comes to MARA's stock price. If prices turn around and begin to come down, then it becomes an uphill battle for investors betting on the company's secular operations, which we think are going in the right direction. In addition to the BTC holding, MARA is a massive diluter: Seeking Alpha Since our last article, the total supply of shares has increased by nearly 90%, which shows that the company is willing to sacrifice investors' ownership in the business to grow at a faster rate, something that isn't typically correlated with excellent long-term returns. On their own, both of these risks are manageable, but together, they hamper what would otherwise be a clean & straightforward investment thesis into MARA, especially given that the company trades at a reasonable looking 11x FWD EV/Sales. Additionally, because of these risks, it may not make sense to own the stock outright as things progress. That said, there are a number of ways to profit from a directional thesis while heavily controlling risk - including selling cash-covered put options. The Trade Enter our trade idea. It makes sense to have exposure to a solid level of operational execution at MARA (and crypto in general), but the accompanying downsides need to be controlled for, such that an entry into the stock would take them into account & provide an excellent margin of safety. Thus, the perfect strategy to use in this situation is a put selling strategy that allows investors to earn a very healthy cash-on-cash return, while selling the rights to buy shares from hedgers at a much better price. That way, it's a win-win scenario - either put sellers get to acquire stock as it dips in price, or they get paid handsomely for taking this 'risk'. In this scenario, selling the September 20th, 2024, $9 strike contracts appears to be the most attractive option: TradingView Right now, they're going for $1.07 per share or $107 per contract. If they expire worthless, this implies a cash-on-cash return of 13.4% over the next 225 days, which annualizes to an annual yield of 21.1%. Because an entry point at $9 (if assigned) is so far below the current market price, and also near the stock's recent yearly lows, it appears to be an attractive place to acquire shares, especially with such a large margin of safety to where things currently stand. If you're more bullish on MARA, then you could increase your risk & reward profile by looking at the $12-$15 strike options. That said, to us, the $9 strike appears to be the best option when it comes to balancing the risks of dilution and Bitcoin volatility with management's plans to profitably expand the business. Summary All in all, we're excited by MARA management's recent moves, including the verticalization efforts that now appear underway and should improve the cost structure. That said, the company's continued dilution and massive BTC price exposure make us feel that the most risk-optimized reward to find here is within the option chain - specifically the September 20th put option complex. While there are some risks to this trade, including multiple earnings reports between now and expiry that could seriously negatively impact the stock price, the $5 strike provides a great balance of risk and reward, and should handsomely reward sharp investors. Stay safe out there!