Will the Real Riot Blockchain Please Stand Up?

Colorado-based cryptocurrency miner Riot Blockchain (NASDAQ:RIOT) appointed board member Jason Les as its chief executive officer on Feb. 8. RIOT stock has more than doubled since the company appointed the Bitcoin (CCC:BTC-USD) expert to be its leader. 

While the stock pulled back in recent days, it’s still up more than 90% since that announcement. There’s no question the company has captured investors’ imagination. I continue to cheer for any blockchain solutions that will make the financial services industry more transparent and efficient. 

What I fail to see is how Riot fits into the entire scheme of things. Here’s why I feel this way. 

Before RIOT Stock

Buried in the excitement of Riot Blockchain’s press release announcing Les’s appointment were a few words about former CEO Jeff McGonegal. 

“Jeff McGonegal, who was appointed Chief Executive Officer in early 2019, will return to focus on his long-standing position as Chief Financial Officer, a position held since 2003,” the company stated in its Feb. 8 press release.

Immediately, my mind wanders to the fact McGonegal was CFO at the company before taking on the CEO role in early 2019. Nothing unusual about that until you consider that he was CFO for 16 years, starting in 2003. 

It turns out that Riot Blockchain has a history. If you know this story already, I apologize for its retelling; I couldn’t help myself. 

In January 2018,  InvestorPlace contributor Chris Tyler discussed why RIOT stock was looking like an attractive speculative bet due to a 65% collapse in its share price at the beginning of the year.  

“I can’t guarantee Riot’s path is set in stone. However, the history of companies changing names, not to mention business models, to cash in on the next big thing hasn’t been kind to investors that overstay their welcome. And RIOT stock fits the mold,” Tyler wrote. 

The Bloomberg article he links to discusses the company’s name change in October 2017 from Bioptix, a maker of biotech diagnostic machinery, to Riot Blockchain, a company focused on cryptocurrencies and blockchain.

Before Bioptix, it was Venaxis, a company that was focused on marketing an acute appendicitis test called APPY1. It got shot down by the Food and Drug Administration in February 2015. Venaxis stock fell by 73% on the news. Venaxis changed its name to Bioptix in December 2016. 

In December 2012, AspenBio changed its name to Venaxis to reflect its focus on in-vitro diagnostics. 

So, in less than five years, predecessors to Riot Blockchain had three corporate names. Not the stuff that builds confidence, in my opinion. And yet, it’s got a market capitalization of $3.3 billion. 

What’s the Attraction?

Well, according to InvestorPlace contributor David Moadel, it’s the fact that Riot Blockchain is an efficient miner of Bitcoins. It does this from its facility in Massena, New York. There it has 6,040 next-generation Bitmain Antminers. According to my colleague, Riot mined a total of 730 Bitcoins in the first nine months of 202o.

Also, it has a couple of cryptocurrency and blockchain investments. That’s all very nice, but it doesn’t pay the bills.  

According to its Q3 2020 financials, the company has $62.3 million in assets on its balance sheet, most of that cash and cryptocurrencies. More importantly, it has an accumulated deficit of $233.8 million, resulting from years of financial losses. 

For the first nine months, the company had $6.8 million in revenue and an operating loss of $18.5 million. Included in the loss was a non-cash impairment charge of $9.4 million for the write-off of its entire investment in Coinsquare, a cryptocurrency platform that ran into regulatory troubles with the Ontario Securities Commission. 

If you exclude the $9.4 million impairment, and it lost $9.1 million on an operational basis in the first nine months, 40% higher than a year earlier. 

Its two existing investments – Verady and Tess – are valued at $300,000. I don’t see them being a factor in Riot Blockchain’s valuation. 

The Bottom Line

Most of my InvestorPlace colleagues are very high on Riot Blockchain stock. The excitement lies in the rapidly appreciating Bitcoin assets it holds. 

After the end of the third quarter, the company sold 100 Bitcoins for $1.55 million. That’s $15,500 per Bitcoin. At today’s prices, even after its big dive, those 100 Bitcoins would be worth $4.6 million. 

So, at the end of September, it held cryptocurrencies worth $9.0 million. Based on the price it got for the sale of 100 Bitcoins, let’s assume it has 480 Bitcoins [$9.0 million divided by $15,500 minus 100 Bitcoins from the sale] with a current value of $24 million, up from $9 million.

I’m not sure that justifies a $3.3 billion valuation, but investors clearly feel that its mining capabilities will continue to push its share price higher. 

Jeff McGonegal, who’s been with the various entities since 2003, owns 287,000 shares of RIOT stock. He, more than anyone, is cheering for a higher stock price. 

Until I see more evidence that this isn’t another pivot to make money off gullible investors, I wouldn’t touch this with a 10-foot pole. 

But I seem to be the dissenting voice on this one. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.