A blockchain is a form of ledger technology that stores records in a decentralized manner, making it difficult or impossible to alter. Hence, it has gained massive attention for use in various applications to make our digital existence more secure and traceable.

However, along with the overall technology industry, blockchain companies have come under increasing pressure due to aggressive interest rate hikes by major central banks in their efforts to contain stubborn inflation. Moreover, cryptocurrency, one of the primary use cases of blockchain technology, is increasingly facing regulatory concerns and sell-off.

The Federal Reserve Chair Jerome Powell cited a “real need for a more appropriate regulation,” and JPMorgan’s CEO, Jamie Dimon, went one step further to call cryptocurrencies “decentralized Ponzi schemes.” As a result of these headwinds acting in tandem and investors’ growing concerns over risky assets amid the uncertain economic environment, the most popular cryptocurrency, Bitcoin, slid below $19,000 last week.

Given blockchain’s bleak growth prospects, we think it would be wise to sell fundamentally weak blockchain stocks Block, Inc. (SQ), Marathon Digital Holdings, Inc. (MARA), and Riot Blockchain, Inc. (RIOT) to avoid further losses.

Block, Inc. (SQ)

SQ is a technology company that creates tools to enable businesses, sellers, and individuals to participate in the digital economy. The company operates through two segments: Square and Cash App.

On September 22, SQ announced that it would provide “Buy Now, Pay Later” (BNPL) functionality to sellers using SQ’s e-commerce products across Canada. This marks the company’s first integration with Afterpay in the country. BNPL is a risky bet for SQ, with Apple Inc. (AAPL) and Affirm Holdings, Inc. (AFRM) emerging as rivals in this space.

In addition, according to a report by UBS analyst Rayna Kumar, the “risk profile” of Afterpay has changed amid rising interest rates and the potential of increased regulation.

On August 24, it was announced that a class action lawsuit had been filed against SQ on allegations of negligent security after a breach of 8.2 million users’ data in the Cash App. The company disclosed the violation through an SEC filing four months after the incident without explaining the delay.

On August 19, the Consumer Financial Protection Bureau (CFPB) filed a petition asking a federal judge to force SQ to fully comply with the demands of an investigation related to Cash App’s handling of payments and disputes. The company is yet to provide all the documents and data requested by the bureau in August 2020 and August 2021.

SQ’s net revenue declined 5.9% year-over-year to $4.40 billion for the second quarter of fiscal 2022 ended June 30. The company reported an operating loss of $213.77 million for the quarter, compared to $124.99 million in the year-ago period. Its adjusted EBITDA for the quarter declined 47.9% year-over-year to $187.34 million

In addition, the company reported an adjusted net income and adjusted net income per share of $110.74 million and $0.36, down 56.8% and 63.3% year-over-year, respectively.

Analysts expect SQ’s revenue for the fiscal year (ending December 2022) to decrease 0.6% year-over-year to $17.56 billion. The company’s EPS for the current year is expected to decline 48.9% year-over-year to $0.87. The stock has plunged 19.7% in the past month and 66.5% year-to-date.

SQ’s POWR Ratings are consistent with its dismal performance and bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It also has a D grade for Stability, Sentiment, and Quality. It is ranked #87 out of 101 stocks in the F-rated Financial Services (Enterprise) industry. 

Click here to access additional ratings for SQ’s Growth, Momentum, and Value.

Marathon Digital Holdings, Inc. (MARA)

MARA is a digital asset company that focuses on the blockchain ecosystem and the generation of digital assets. The company mines cryptocurrencies and holds bitcoins in an investment fund.

On August 1, MARA expanded its credit facility by increasing its debt funding capacity by $100 million. This facility is expected to add to the company’s debt burden, with rising interest rates threatening to hurt its bottom line further.

MARA’s revenues for the fiscal 2022 second quarter ended June 30 decreased 15% year-over-year to $24.92 million. During the same period, the company’s operating loss and adjusted EBITDA widened 61.6% and 40.1% year-over-year to $178.21 million and $147.20 million, respectively.

Furthermore, the company’s quarterly net loss deteriorated 76% year-over-year to $191.65 million, while its loss per share of $1.75 worsened 60.6% year-over-year.

Analysts expect MARA’s revenue and loss per share for the third quarter of fiscal 2022 (ended September 2022) to worsen 46.1% and 31.8% year-over-year to $27.85 million and $0.29, respectively. Moreover, the company has missed the consensus EPS estimates in each of the trailing four quarters.

MARA’s stock has lost 7.8% over the past month and 67.4% year-to-date.

MARA’s weak fundamentals are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. It has an F grade for Growth, Value, Stability, Sentiment, and Quality.

Click here to see additional ratings for MARA.

Riot Blockchain, Inc. (RIOT)

RIOT focuses on Bitcoin and general blockchain technology. The company operates in the overall blockchain ecosystem through its cryptocurrency mining operations, internally developed businesses, joint ventures, and targeted investments in the sector.

For the fiscal 2022 second quarter ended June 30, RIOT’s adjusted EBITDA for the quarter came in at a negative $65.17 million, compared to a $2.39 million gain during the same period in the previous year. The company’s net loss came in at $366.3 million, compared to a net income of $19.3 million in the previous-year quarter.

In addition, the company reported an adjusted quarterly loss of $0.50, compared to an adjusted EPS of $0.03 in the year-ago quarter.

Analysts expect RIOT’s revenue for the fiscal 2022 third quarter ended September 30 to decrease 4% year-over-year to $62.24 million. The company is expected to report a net loss per share of $0.03 during the same period. Moreover, it has missed the consensus EPS estimates in three of the trailing four quarters.

The stock has plummeted 68.2% over the past six months and 72.7% over the past year.

RIOT’s bleak outlook is reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. It also has an F grade for Stability, Sentiment, and Quality and a D grade for Value.

It is ranked penultimate among 79 stocks in the D-rated Technology – Services industry. 

Click here to see the additional ratings of RIOT for Growth and Momentum.

SQ shares were trading at $53.95 per share on Monday morning, down $1.04 (-1.89%). Year-to-date, SQ has declined -66.60%, versus a -23.45% 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...

More Resources for the Stocks in this Article