Yesterday, Riot Platforms, Inc. (RIOT), which operated as Riot Blockchain, Inc. until the end of last year, reported record results for the previous fiscal with improvement in top line and losses that were remarkably less than Street expectations. However, a deeper look into the fundamentals indicates potential red flags which warrant giving the stock a wide berth for the foreseeable future.

The bitcoin-driven infrastructure platform supports the cryptocurrency ecosystem through proof-of-work mining and associated digital infrastructure. Despite losing 13.1% over the past month and 65.1% over the past year, RIOT closed the last trading session at $6.18, above its 50-day and 200-day moving averages of $5.48 and $6.04, respectively.

Let’s take a closer look at RIOT’s fundamentals.

Dismal and Deteriorating Financials

For the fourth quarter of the fiscal, which ended December 31, 2022, RIOT’s net revenue decreased 33.8% year-over-year to $60.15 million.

During the same period, RIOT’s operating loss came in at $158.09 million, compared to a loss of $27.96 million in the prior-year quarter. As a result, the company’s adjusted EBITDA loss came in at $13.93 million, compared to an adjusted EBITDA of $22.65 million in the prior-year quarter.

RIOT’s net loss for the quarter widened to $155.78 million, compared to a net loss of $26.98 million during the previous-year quarter. The company reported an adjusted loss of $0.07 per share, compared to the adjusted EPS of $0.21 in the year-ago quarter.

For the fiscal year, which ended December 31, 2022, RIOT’s net revenue increased 21.5% year-over-year to $259.17 million, driven by higher Bitcoin production and the inclusion of a full year of Data Center Hosting and Engineering revenues.

However, RIOT’s operating loss for the fiscal year came in at $512.70 million, compared to a loss of $29.87 million during the previous fiscal year. As a result, the company reported an adjusted EBITDA loss of $67.19 million, compared to an adjusted EBITDA of $74.91 million during the previous fiscal year.

RIOT’s net loss for the fiscal year widened to $509.55 million, compared to a net loss of $15.44 million during the previous fiscal year, due to non-cash impairment charges totaling $538.6 million, including goodwill impairment of $335.6 million associated with the Whinstone and ESS Metron acquisitions in 2021, impairment of cryptocurrencies held of $147.4 million, and impairment of miners of $55.5 million.

The company reported an adjusted loss of $0.47 per share, compared to an adjusted EPS of $0.79 in the previous fiscal year.

Poor Profitability

RIOT’s track record of consistent losses has also been reflected in its profitability metrics. It has a trailing 12-month gross profit margin of 40.48%, compared to the industry average of 49.18%. Its trailing 12-month EBITDA and net income margins of negative 38.17% and negative 128.74% also stand out in stark contrast to the industry averages of 11.28% and 2.89%, respectively.

Moreover, in terms of the trailing 12-month ROCE, ROTC, and ROTA, RIOT significantly underperforms relative to the industry averages of 4.97%, 3.21%, and 1.52%, respectively.

Discouraging Analyst Estimates

Analysts expect RIOT’s revenue for the fiscal 2023 first quarter to decrease 11.6% year-over-year to $70.50 million. Despite surpassing the fourth quarter and full fiscal consensus estimates, the company is expected to report a loss of $0.09 per share during the same period, compared to an EPS of $0.30 during the previous-year quarter.

Stretched Valuation

Despite the drawdown in stock price, RIOT is still trading at a premium compared to its peers.

RIOT’s forward EV/Sales multiple of 3.11 is 10% above the industry average of 2.83. Similarly, its forward Price/Sales multiple of 4.04 exceeds the industry average of 2.71 by 49.1%.

POWR Ratings Reflect Weakness

RIOT has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RIOT also has an F grade for Stability, as reflected in its exceptionally high beta of 4.29 and the vast spread between its 52-week high and low prices of $23.66 and $3.25, respectively. Moreover, it also has an F grade for Quality, consistent with weak profitability.

RIOT has a D grade for Value and Sentiment, in sync with its stretched valuation and bleak analyst estimates. Unsurprisingly, it is ranked penultimate of 80 stocks in the Technology – Services industry.

Beyond what I have discussed above, additional ratings for Growth and Momentum of RIOT can be found here.

Identity Crisis?

On January 3, 2023, RIOT announced its rebranding from Riot Blockchain, Inc. to Riot Platforms, Inc., as a part of what the company claims to be a “growth strategy to continue expanding its increasingly diversified business operations and reflects a renewal of its corporate vision to become the world’s leading Bitcoin-driven infrastructure platform.”

To sum up, RIOT, in all its incarnations, is a company that has had a change of control of the board, a change of the line of business, and a skyrocketing stock price following some corporate actions. Companies with such a chequered past were dabbling with cryptocurrencies only cemented Charlie Munger’s colorful opinion on the asset class.

Bottom Line

Weak fundamentals and red flags apart, amid a regulatory clampdown on cryptocurrencies, increasing interest rates, and ebbing interest in its core asset class, RIOT is best sold or, even better, avoided until it can get as “creative” with its business model as it has been with its accounting practices and nomenclature.

Stocks to consider instead of Riot Platforms, Inc. (RIOT)

Given its weak fundamentals and uncertain prospects, the odds of Riot Platforms outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with more impressive POWR Ratings. So, consider these 3 A-rated (Strong Buy) tech stocks instead:

Cisco Systems, Inc. (CSCO)

Box, Inc. (BOX)

Celestica Inc. (CLS)

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RIOT shares were trading at $6.30 per share on Friday afternoon, up $0.12 (+1.94%). Year-to-date, RIOT has gained 85.84%, versus a 5.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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