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Riot Blockchain (NASDAQ:RIOT) reported its latest numbers on May 10 and considering the price of Bitcoin in Q1 had dropped significantly from Q4 of 2021, its performance was fairly solid.

While the company was slightly under expectations on the revenue side, I’m not concerned with that because of its healthy balance sheet and the eventual rebound in Bitcoin’s (BTC-USD) price. When combined with the increase in Bitcoin mined, it’s only a matter of time before the company boosts revenue significantly beyond current levels.

In this article we’ll look at the key catalyst for RIOT, its long-term durability, and how it’s strongly positioned to leverage the price of Bitcoin once sentiment turns positive concerning the flagship cryptocurrency.

Latest earnings

Revenue in Q1 came in at $79.8 million, a year-over-year gain of 244 percent that was slightly below analysts’ expectations of $81.8 million. Of that total, $57.9 million came from mining, representing a gain of 150 percent from the $23.2 million in mining revenue in Q1 of 2021. Revenue from engineering was $12.1 million, and revenue from hosting finished at $9.69 million.

Net income for the quarter climbed to $35.4 million, or $0.30 per share, against the net income of $7.5 million, or $0.09 per share generated in Q1 of 2021.

Interestingly, the company said it chose to “exclude” an impairment of $26.4 million in the quarter that had a negative impact on net income; something readers should take into account when evaluating the quarter’s performance.

Adjusted EBITDA was $11.7 million, up from the $11.1 million in Q1 2021.

Overall costs in the reporting period jumped from $15.8 million last year in Q1 to $41.9 million in the first three months of 2022.

Mining revenue margin in the reporting period was $38.9 million, representing 67 percent of mining revenue. Last year Q1 mining revenue margin was $15.6 million, or 68 percent of mining revenue. Management said that even with a 12 percent year-over-year drop in the price of Bitcoin, improved efficiencies helped mining revenue margin to remain almost the same based upon percentages.

The company said that revenue Q1 2022 averaged $41,241, while revenue in Q1 2021 averaged $46,729.

Improved efficiencies came from the increase in the number of “new generation miners at its Whinstone US, facility net of increases in the difficulty index associated with solving BTC mining algorithms.”

Concerning Bitcoin production, it climbed 4 percent sequentially to 1,405 Bitcoin, up from the 1,354 Bitcoin mined in Q4 2021. Beyond the reporting period, management said it produced 15 percent more Bitcoin in April 2022. It sees its hash rate for 2023 coming in at 12.8 EH/S.

Balance sheet

At this time, I consider the balance sheet of Bitcoin miners to be very important as the companies wait for the price of Bitcoin to reverse direction on positive sentiment. To that end, RIOT Blockchain looks good going forward. At the end of March 31, 2022, the company had total assets of $439.7 million, which the company stated was “highly liquid.” At the end of the quarter the company held $113.6 million in cash.

As of April 30, 2022, management reported RIOT had an unaudited 6,320 in Bitcoin on its balance sheet.

Having significant liquidity in a time of challenging economic times and lower Bitcoin prices is vital to the performance of RIOT. Not only does it give it a cushion to ride out the tough times, but also a revenue source to expand its operations at a time when some of its competitors struggle to do so.

I would have preferred that the company gave more specific numbers as to what “highly liquid” meant concerning its assets, but it appears it has more than enough capital to play offense and defense in the sector it competes in.

The price of Bitcoin

The price of Bitcoin is, of course, the major catalyst for Bitcoin miners, and how the price of Bitcoin goes, so goes their performance. For the most part, the price of RIOT correlates with the price of Bitcoin, with the occasional exception when it can leverage the price of Bitcoin, temporarily, on either side of the price, as the chart below confirms.

RIOT Blockchain share price compared with Bitcoin price

TradingView

At a time of extreme positive sentiment, the share price of RIOT can temporarily break out of correlation with the price of Bitcoin, but it can be counted on to snap back into place once the enthusiasm wanes.

The same is true when negative sentiment dominates the price of Bitcoin, as it is now. In that case, RIOT has been oversold when measured against its fundamentals.

That’s something to always consider with RIOT and any other Bitcoin miner; they will at times move beyond a tight trading pattern with Bitcoin and surprise on either side of the play.

Those going long should take that into consideration when deciding on whether or not to take profits or not. The same is true for shorts who may be tempted to hang on too long in order to extract all the profit out of the play. I wouldn’t recommend either strategy.

The one exception would be for those that have an extremely low-cost basis and have a lot of flexibility on when to sell their shares. If I had a very low-cost basis, I would continue to hold because I have no doubt in my mind the price of Bitcoin will eventually resume its upward move and break out to new highs.

For shorts, it’s getting more dangerous the more the price of RIOT falls. Each drop in price makes risk/reward less desirable. Even though the price of Bitcoin could easily drop more, it could just as easily have reached a bottom. We simply have no idea either way. After the steep decline in the share price of RIOT and Bitcoin, I would be extra cautious if tempted to short RIOT under these conditions.

Conclusion

I thought the last quarter was a decent one for RIOT under the weaker price of Bitcoin. If the price of Bitcoin remains subdued through the end of June, which is possible, its earnings report will likely be weaker, depending on how many Bitcoins RIOT mines, and how much revenue it generates from its other segments.

Whatever direction the price of Bitcoin takes in the near term, I consider RIOT’s current share price a good entry point. Even if it drops further, it provides a good base to size downward to lower the cost basis.

With a very liquid balance sheet and growing out its mining capacity, RIOT is strongly positioned to take advantage of what I think is the inevitable rebound in the price of Bitcoin.

There is no idea of knowing how long it’ll take, but when it does, I believe RIOT will be among the big winners among the Bitcoin miners, generating strong returns for patient shareholders.



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