At the onset of the COVID-19 pandemic in March, the most popular cryptocurrency, Bitcoin, traded below $4,000. In addition to the public health crisis, a weak global economy, dovish U.S. monetary policy and a weak U.S. dollar enhanced the appeal of cryptocurrencies to  retail and institutional investors. Consequently, Bitcoin has rallied sharply and surpassed the $34,000 mark on January 3.

Riot Blockchain Inc. (RIOT) and Canaan, Inc. (CAN) are  two prominent players in the digital and cryptocurrency industry. They have been the direct beneficiaries of the bull run. Both companies have  thrived as investors have been drawn increasingly to add cryptocurrencies to their asset allocations (in lieu of gold and other precious metals) to hedge against inflation and to store value.

Both stocks have delivered significant returns over the past nine months. While RIOT returned 1,731.1% over this period, CAN gained 131.9%. In terms of past three months’ performance, RIOT is a clear winner with 533.9% returns versus CAN’s 257.2%. But let’s find out which of these stocks is a better pick now.

Business Structure and Latest Movements  

RIOT focuses on building, supporting, and operating  Blockchain technology ecosystems in addition to manufacturing in-vitro substances in the biotechnology field. Its portfolio includes Verady, Coinsquare, and Tesspay, which  are involved in digital currency mining operations that utilize specialized computers to  generate digital currencies, primarily bitcoin. RIOT’s currently deployed hardware fleet consists of 6,040 next generation Bitmain Antminers with a hash rate capacity of 456 PH/s.

RIOT is aggressively expanding its operation. In December it  purchased an additional 1,500 next generation S19 Pro and S19j Pro Antminers from BitmainTech.  The deployment is expected to increase RIOT’s bitcoin mining hash rate capacity by 65%.

CAN is a leading provider of supercomputing solutions and integrated circuit (IC) final system products, as is renowned for having invented the world’s first ASIC-powered bitcoin mining machine in 2013 that radically catalyzed the growth of a computationally advanced bitcoin mining sector. The China-based company is  the second largest designer and manufacturer of bitcoin mining machines globally and continues to expand its suite of advanced hardware offerings, exploring opportunities across emerging technologies.

CAN recently launched second-generation AI chip Kanzhi K510 after two years of development. The chip is positioned in the mid- to high-end market and is an edge-side AI chip fully oriented to application scenarios. Compared with the first-generation of AI-chips, the computing power of this chip is three times more powerful.

Recent Financial Results

In the third quarter ended September 30, 2020, RIOT’s mining revenue surged 41.5% year-over-year to $2.4 million. The company has produced 730 newly minted bitcoins (BTC) year-to-date, despite experiencing downtime in the previous quarter. RIOT reported a quarterly loss of $0.04 per share, representing a significant improvement from the prior quarter’s $0.31 per share loss.

RIOT received and deployed 3,040 next-generation Bitmain S19 and S19 Pro Antminers during the July – November period,  increasing the company’s total hashrate capacity to 566 PH/s. RIOT also contracted for 15,600 next-generation Bitmain S19 Pro Antminers in the third quarter of 2020.

In the third quarter, CAN delivered total net revenues of $24 million, declining 75.7% year-over-year and 8.5% sequentially. The decrease was driven primarily  by decreases in total computing power sold and average selling price per Thash/s during the quarter. CAN reported a loss of $0.54 per share, which more than quadrupled the quarter-ago loss of $0.10 per share.

Here RIOT is in an advantageous position.

Past and Expected Financial Performance

RIOT’s revenue has grown 28.9%, while its EPS declined 63.7%, year-over-year, over the past 12 months.

In comparison, CAN’s revenue declined 29.5%, its EPS grew 219.4%, year-over-year, over the past 12 months.

However, analysts expect RIOT’s revenue to increase 412.5% in the current year. The company’s EPS is expected to grow 103.8% in the current year and at a rate of 20% per annum over the next five years.

RIOT has an edge over CAN here as well.

Profitability      

CAN’s trailing-12-month revenue is more than 16 times RIOT’s. But RIOT is the more profitable with a gross profit margin of 74.6% versus CAN’s negative value.

Valuation

In terms of trailing-12-month P/S, RIOT is currently trading at 70.45x, 236% more expensive than CAN, which is currently trading at 7.15x. Moreover, CAN is less expensive in terms of trailing-12-month P/B (11.60x versus 13.70x).

Though RIOT looks much more expensive compared to CAN, we think it is worth paying this premium considering RIOT’s significantly higher earnings growth potential.

POWR Ratings

While RIOT is rated “Strong Buy” in our proprietary POWR Ratings system, CAN is rated “Neutral.” Here are how the four components of our overall POWR Rating are graded for RIOT and CAN:

RIOT has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “D” for Industry Rank. In the 63-stock Technology – Services industry, it is ranked #8.

CAN has an “A” for Industry Rank, a “C” for Trade Grade and Buy & Hold Grade, and a “D” for Peer Grade. It is ranked #23 in the 32-stock Technology – Hardware group.

The Winner

While both RIOT and CAN are good long-term investments considering their continued business growth and wider cryptocurrency adoption. But RIOT appears to be a better buy based on the factors discussed here.

According to Markets and Markets, the cryptocurrency market is projected to grow at a CAGR of 6.18% to $1.40 billion by 2024. Innovating technologies such as growth of Decentralized Finance (DeFi), blockchain, and quantum computing are shaping a new trajectory for the future of bitcoin mining. Leading digital payments platforms like Paypal (PYPL) and Square (SQ) are now supporting cryptocurrencies as trading and payment options. This has further enhanced the confidence of investors in Bitcoin. CNBC Bitcoin investor Mike Novogratz even believes that every central bank will  issue a digital currency within the next five years.

While CAN is a relatively cheaper option to bet on the accelerating shift towards cryptocurrencies, RIOT is growing rapidly, and we think its premium valuation is justified as it has more room to grow its earnings.

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RIOT shares were trading at $16.88 per share on Tuesday morning, up $0.40 (+2.43%). Year-to-date, RIOT has declined -0.65%, versus a -0.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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