With an initial public offering expected this week - and one that will be featured on Robinhood's IPO Access - a lot of investors will be asking: "Should I buy Stronghold Digital Mining stock?"
Before I can answer that question, let me give you a little background.
Stronghold Digital Mining (NASDAQ: SDIG) is a Bitcoin miner based in Kennerdell, Pa. But it's not your typical Bitcoin miner.
Stronghold runs Bitcoin mining hardware it acquires elsewhere, but it generates its own electricity to run them - by burning waste coal.
That may seem an odd choice in these times of heightened awareness of the dangers of carbon emissions. And in fact, the waste coal that Stronghold burns - left over from the Keystone State's coal mining heyday - produces 37% more carbon per megawatt than regular coal.
But Stronghold's choice is sound from a business perspective. It greatly benefits from special state-mandated credits that reduce its cost to mine Bitcoin and bolster profits.
You see, the state of Pennsylvania is desperate to get rid of the 800 or so piles of waste coal that are not only unsightly but leech toxic chemicals into the area's ground and water.
That's why the state included waste coal in its rules that force utilities to buy credits for energy produced with sources the state wants to encourage. That includes mostly renewable energy, but also plants that burn stuff Pennsylvania wants to get rid of, such as solid waste (garbage) and waste coal.
Last year, the state mandated that utilities had to buy the credits from plants operating within state borders (before they could get them from a plant in any of the 13 states within the PJM grid). That caused the value of the credits to rocket from about $0.25 each to as high as $20.
With the credits, Stronghold's cost to mine one bitcoin sank to below $3,000. When Bitcoin is trading in the $55,000 range, that's quite a juicy profit margin.
It also represents a huge advantage over rivals. For other miners, the cost to mine one bitcoin ranges from $7,000 to $11,000.
Now let's look at the details of the IPO, how the company has been doing, and what potential investors can expect over the next couple of years...
Stronghold Digital Mining by the Numbers
Stronghold plans to sell 5.9 million shares of stock at about $17 per share (pricing is not yet finalized). That will raise about $100 million and give the company a market cap of about $770 million.
Performance over the past couple of years has been uneven as a result of the company spending on expansion of its operations as well as the volatile price of Bitcoin. But a few key numbers are moving in the right direction.
Revenue for the first half of the 2021 was up 263.7% from the same period in 2020. Cash flow from operations nearly tripled.
But investors will want to focus on is Stronghold's strategy for expansion. Remember, the company's crazy-low energy costs/high margins mean it can rapidly amp up income by growing operations.
In addition to its current facility, called Scrubgrass, Stronghold is in the process of buying another, a plant called Panther Creek near Allentown, and is seeking to buy at least one more.
It's also snapping up Bitcoin mining equipment at a furious pace. It has 3,000 miners now, but has agreements with three suppliers to buy 26,150 more over the next year or so. The IPO proceeds will allow the company to buy 55,800 more miners. Stronghold says the new equipment, which packs a higher hash rate than its existing miners, will boost its mining power from 185 petahashes to more than 8,000 petahashes by the end of 2022. That's a 43-fold increase in hash power.
That doesn't necessarily mean Stronghold's revenue will jump 43 times higher. That's because cryptocurrency operations make up less than 40% of revenue at the moment, with energy operations accounting for the rest.
But if all goes as planned, Stronghold's revenue will grow by tens of millions of dollars in less than a year, and a big chunk of that will fall to the bottom line.
Should I Buy Stronghold Digital Mining Stock?
So now we're back to the original question.
Should you buy Stronghold Digital Mining stock when the IPO launches?
First of all, if you're concerned about the company's carbon footprint, you may want to avoid SDIG. While the company emphasizes how it's cleaning up Pennsylvania's ground and water, the burning of waste coal will put more carbon the air and contribute to climate change.
Putting that aside, Stronghold is a stock worth considering.
Since the company is structured to expand rapidly, the real question is whether $17 a share is a fair price.
Here it will help to look at the price-to-sales ratio, since Stronghold, like most startups, isn't yet turning a profit.
The most recent sales data the company has filed is from the 12 months ended June 30, so we'll have to pair that with the number of shares outstanding as of the IPO and the expected offer price of $17 per share. That gives us a P/S of 51.5, which is fairly high even for a young company.
Let's compare that to the price-to-sales ratio of a few other Bitcoin mining stocks. Riot Blockchain (NASDAQ: RIOT) has a P/S of 29.6, while that of Argo Blockchain (OTC: ARBKF) is 10.9 and that of Hive Blockchain Technologies (NASDAQ: HIVE) is 8.9. Only the P/S of Marathon Digital Holdings is higher, coming in at a lofty 90.1.
The other wild card, of course, is the price of Bitcoin. The rapid rise in the Bitcoin price over the past year has supercharged Bitcoin mining stocks. Over the past 12 months, HIVE is up 170%, RIOT is up more than 200%, MARA is up 780%, and ARBKF is up 880%.
A prolonged downturn for Bitcoin would have the opposite effect - as a quick glance at the bleak performance of the miners in 2019 will tell you.
But Stronghold has an advantage over its rivals here in that it has a second source of non-crypto revenue (the electricity it sells to PJM). And for now at least, it appears Bitcoin is in a bull phase.
A higher Bitcoin price combined with Stronghold's planned expansion suggests a lot of money could be made here. Just bear in mind that the potential comes with above-average risk.
Judging by the high P/S, it looks like Stronghold's IPO price is an attempt to extract future value now. But given the company's rosy prospects, a price of $17 isn't outrageous. The problem is that retail investors usually can't get an IPO at the offer price, and many end up chasing the stock at much higher levels.
However, in this case, retail investors have an opportunity to get in at the IPO price courtesy of Robinhood, which is making SDIG available as part of its IPO Access program. The exposure to Robinhood's large customer base should also draw more interest and help boost the price.
If you aren't on Robinhood, you probably don't want to buy Stronghold stock on the day of the IPO (trading is likely to be quite volatile). Otherwise wait for a pullback - anything under $20 is a good entry point. And if you do buy SDIG, consider making it one of your smaller positions to offset some of the risk.
This is definitely a Bitcoin mining stock to watch. If Stronghold can execute and the Bitcoin price stays above $50,000, the stock could easily double or triple from the offer price over the next 12 to 18 months.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.