InvestorPlace’s Ian Cooper wrote a piece in early March arguing that Riot Blockchain (NASDAQ:RIOT) stock should be in every investor’s portfolio. Since Cooper wrote those words, RIOT stock is up 30% through March 30.
If you took Cooper’s advice and bought some of the crypto miner’s stock, I applaud your unrealized gains.
However, don’t mistake your short-term success with long-term portfolio planning. In my estimation, leaving RIOT stock in your portfolio for an extended period of time would be a big mistake.
Here’s why.
RIOT Stock Is Not BlackRock
They used to say that if you wanted to get rich, you bought shares in a growing mutual fund provider and not that provider’s mutual funds. Of course, this was a saying from the 80s and 90s. The crypto traders of today’s world likely wouldn’t even know what a mutual fund is.
I’m being facetious, of course.
However, Cooper’s argument for buying was based on the fact that “as long as Bitcoin (CCC:BTC-USD) can push to higher highs, the mining companies are sure to follow.”
It’s a simple premise, and in a vacuum it makes sense. The same theory would obviously apply to some of the other public companies that mine Bitcoin, such as Marathon Digital Holdings (NASDAQ:MARA) and HIVE Blockchain Technologies (OTCMKTS:HVBTF).
Together, these three companies have a combined enterprise value of $8 billion. Based on their combined trailing 12-month revenue of $65 million, the three companies have a price-to-sales ratio of 123, and that’s with HIVE generating 80% of those sales.
None of the three are profitable. Not even close. Ok, so back to my analogy about mutual funds.
Canaan Seems Like a Better Buy
In this instance, if we stick to the analogy, you would be wiser to invest in Canaan (NASDAQ:CAN), which makes cryptocurrency miners, rather than the companies such as Riot Blockchain that mine Bitcoin, etc.
It currently has an enterprise value of $2.7 billion and trades at 3.1x sales. Unfortunately, it too loses money. In February, Canaan reported that it has purchase-orders for more than 100,000 Bitcoin mining machines in North America. That will tie up its manufacturing capacity for the rest of 2021 and beyond.
That’s a good problem to have.
Further, it’s become a lot pickier about who it sells its machines to, providing shareholders with greater certainty over revenues, costs and profits, ultimately.
In my February article about Riot, I estimated that it held $24 million in cryptocurrencies on its balance sheet. That was based on 480 Bitcoins at $50,000 per coin. Trading up almost another $9,000 per Bitcoin as I write this, Riot’s Bitcoins are now worth approximately $28.2 million.
Why investors are willing to take the leap from a tangible asset such as the 480 Bitcoins it owns to applying a very liberal enterprise value of $3.2 billion is beyond me. At least Canaan has real sales backing its valuation.
It’s Not for Every Investor
My colleague finished his March article by suggesting that he could see Riot Blockchain’s market capitalization doubling or even tripling in the long term. At current TTM sales of $8 million, that’s a forward P/S ratio of 1,290x [$3.44 billion market cap multiplied by 3 divided by $8 million in sales].
Now, I’m sure its revenues will increase over the next 2-3 years, but hardly enough to justify the kind of valuation investors currently give it.
There’s another thing about my colleague’s argument that’s got me thinking.
Cooper refers to MicroStrategy (NASDAQ:MSTR) CEO Michael Saylor’s view that Bitcoin could eventually have a market cap of $100 trillion. In the same breath, Cooper mentions the $170 million and $1.5 billion of Bitcoin that Square (NYSE:SQ) and Tesla (NASDAQ:TSLA) bought, respectively.
If Bitcoin is all that and a bag of chips, wouldn’t one of these two statements make more sense than recommending Riot Blockchain for every investor’s portfolio?
A) Bitcoin should be in every investor’s portfolio, or
B) Square and Tesla should be in every investor’s portfolio.
Investing isn’t just about going on the offensive. It’s also about protecting your downside.
For this reason, I don’t believe Riot stock should be in every investor’s portfolio. Not by a longshot.
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.