RIOT: The ultimate guideUnfortunately I had a sell limit at $11.50 that triggered the other week and I'm really regretful because I have conviction in this company. As a result of this unfortunate event, I've decided to share my ultimate breakdown of this company looking forward, I truly believe in this company & hope to inspire some other investors to take a look and buy some :)
The Model
Although Riot is nothing like IIPR, they are in fact very similar. I'm talking about their business models! I'm unsure if a name exists for what I'm about to explain, however for simplicity I like to call it The Perpetual Asset Model.
This model consists of a few steps which are the basis for the growth and allow the company to rapidly expand operations and thus increase both vAssets and vEquity without the need for debt financing. The steps are as follows and are very simple to understand:
(1) Issue equity to raise capital
(2) Use capital for OPEX (e.g., buying ant miners, or property in the case of IIPR)
(3) Seek a tangible ROI (e.g., +mining bitcoin, or rent in the case of IIPR)
Riot can increase the vAssets by issuing equity to buy more ant miners and mine more bitcoin. Usually issuing equity is not good for shareholders (duh) because it dilutes the value per shares. However, there is more than meets the eye, I used the word perpetual in the model's name, lets understand why:
As Riot increases its hash rate with more ant miners, it'll be able to mine more bitcoin and therefore generate more profit, so the reason this model is perpetual lies in the value of bitcoin. If the value of bitcoin (an asset on their balance sheet) increases faster than the equity dilution deteriorates share price, then equity will actually rise in value instead of fall. I used IIPR as an example because the property they buy with cash raised from equity offerings goes towards property that both generates income and appreciates in value (they also sign a 4% annual rent increase YoY with tenants).
So the perpetual nature of this model is a function of bitcoin's value. As bitcoin increases in value and Riot issues more equity to increase mining capability, it'll eventually be able to self-sustain OPEX by (1) mining more bitcoin, (2) selling bitcoin as it increases in value, and (3) using these funds to further grow its operational output, just like IIPR is doing (except their bitcoin is the rent increase YoY + property appreciation equivalent).
In short:
- The assets on their balance sheet will eventually be fully self-funded solely by the appreciation of bitcoin
- Early on, if Riot keeps X% of the bitcoin they mine and issues equity to fund operational expansion (increase mining capabilities), and if bitcoin does keep increasing in value, they'll eventually hit a point where:
PV future profits from increase in mining capabilities > funds received from equity issuance
And therefore, in theory, they'll eventually mine enough bitcoin and have enough on their balance sheet to fully self-fund operations
I hope you all enjoyed this, just me geeking out on some corporate finance stuff (haha), I will be repurchasing Riot very soon, leave me a comment or question, would love to answer! And don't forget to like!
