Bitcoin (BTC-USD) has spent most of 2023 consolidating in a fairly narrow range. That is, for an instrument that is used to producing enormous moves in both directions. That has left stocks that depend upon Bitcoin pricing – like miners – also largely searching for direction. However, with Bitcoin testing extremely consequential support again, we are likely to see a big move up or down. In turn, that’s likely to take the miners with it.
One such miner is Marathon Digital Holdings (NASDAQ:MARA), which I last covered early this summer. The setup then was actually pretty similar to how it is now, with the key difference being that Marathon’s chart looks a lot better than it did if you’re bullish. While Marathon is a long way from a perfect bullish case, it looks to me to be enough to upgrade from hold to buy. Let’s dig in.
Two key support levels for the bulls
Let’s begin with Marathon’s daily chart, which shows Friday’s action testing key trendline support from the bullish move that began back in February. Marathon took a beating on Friday due to a capital structure transaction that will increase the share count by about 26 million. Marathon is no stranger to such transactions (more on that in a bit), and this one was understandably received pretty poorly. However, that’s now baked into the share price, so we can move on and look forward.
I’ve drawn in that trendline in blue, with the stock showing a bounce towards the end of the day to hold it. We’ll see what happens in the ensuing week, but that’s the first line in the sand for the bulls. The second line is prior resistance and then support in the area of $8.50 to $9.00 from earlier this year. Trendline support would be great to hold for the bulls, but the $8.50/$9.00 area is absolutely critical. If that level fails, Marathon could spiral lower, and quickly, if the shorts press the action lower.
Marathon’s short interest is about 27% of the float, which is huge. That means that the action could get really ugly if key support is lost, but it also means that if we get a rally – say, on higher Bitcoin pricing – the shorts could panic and send the stock a lot higher. I’m NOT suggesting you run out and buy Marathon on a miniscule hope of a short squeeze. However, we cannot ignore that 27% of the float is short, and that this is likely to exaggerate the size of any move up or down.
Now, the PPO is turning higher at trendline support, but the bulls need to see some follow through. The 14-day RSI is also showing some relative strength, but again, needs some follow through. The look of Marathon’s momentum indicators are that of a potential bottom, but it’s too early to declare victory for the bulls.
Another thing that makes me lean more bullish is the bottom panel, which shows Marathon’s value relative to Bitcoin. When the line rises, it means investors are paying more for Marathon relative to the price of Bitcoin. It’s moving ever higher, so if/when Bitcoin finally rallies, Marathon is likely to be a much larger beneficiary than it otherwise would be if it were priced at parity with Bitcoin. This is a secondary factor, but a bullish one nonetheless.
Now, let’s take a look at Bitcoin itself.
We’re right back where we were earlier this year, with Bitcoin testing absolutely critical support at $25k/$26k. It is, of course, no accident that Bitcoin stopped where it did, as this has been an area of contention among bulls and bears for a good long while at this point. The fact that we’ve seen so much trading above this level this year, to me, makes it more likely we’re going to resolve higher. The momentum indicators are improving, but don’t look great.
Another factor that makes me slightly less bullish is that Bitcoin scored a pretty sizable legal win recently, but the big rally faded immediately; there was zero follow through from the bulls. That’s not a good look, but it could simply mean more consolidation is on the way. The OG alt currency didn’t break down after the rally failed, so while it could have been better, it could have been much worse, too.
I’m pretty neutral here on Bitcoin, but the overall picture for Marathon is bullish enough that it has tipped me from neutral to bullish. Let’s now turn our attention to a few fundamental factors to round out the analysis.
Margins remain in focus
Marathon’s margins have been unbelievably volatile since it went public, which is expected for a Bitcoin miner. The pricing of its product (the coins themselves) is completely out of the miners’ control, and input costs (equipment, electricity, etc.) as well as the productivity of its machines (mining difficulty) are basically all out of their control. Bitcoin mining will never be a high-quality business with sustainable advantages for that reason, but that doesn’t mean it cannot produce strong equity returns. It simply means you have to be careful with position sizing, timing of entry, and profit-taking. That’s exactly why I use technical analysis, because it allows you to place the odds more in your favor than they otherwise would be.
Now, below we have quarterly gross margin and SG&A costs to illustrate Marathon’s issue with margins at the moment.
Gross margins have been below SG&A costs for a few quarters in the past, which means Marathon operates at a loss. Gross margins have improved of late, and in the past two quarters, just enough to take gross margins over SG&A costs. That’s a good start, but we need to see a lot more progress. What Marathon needs is higher Bitcoin prices to see sustainably better margins. Unless and until that happens, Marathon is likely to continue to need to periodically raise capital, which generally means more common share issuances.
We can see above that Marathon has seen its shares outstanding balloon in the short time it’s been public. This will get worse now that the aforementioned capital structure transaction is underway, and Marathon should be somewhere near 200 million common shares, double what it was two years ago. That sort of dilution is painful for shareholders, but it’s just life with a Bitcoin miner. I’m not excusing it, but share issuances are a part of life for a company that simply cannot afford a bunch of debt.
Revisions have been pretty bleak for the past two years, as Marathon went from being expected to produce almost $5 in EPS to a loss for 2023.
We can see that recent revisions have once again been lower, so we’re not seeing any sort of improvement here. This is unequivocally bearish, and I don’t want to try and sugar coat something that’s simply not good. Share issuances actually make EPS estimates better for now because the losses are spread over more shares. However, if/when Marathon starts to produce earnings sustainably, more shares is a big negative.
The only thing that’s going to move the needle here is much higher Bitcoin pricing, so until we see that, Marathon’s EPS estimates are likely going nowhere fast.
Let’s wrap this up with the valuation, which I think is a mixed bag.
Shares are at about 3.9X forward sales today, which is about middle of the road for the past year’s valuations. Marathon traded much, much higher than this in the past, but that was during big bull moves for Bitcoin. If we get a new Bitcoin bull market, Marathon could very well trade for 10X or 20X forward sales again. But if that ever happens, it will be because we see Bitcoin approaching its old highs at levels more than double current pricing.
Given the current situation with Bitcoin pricing, Marathon looks fairly valued; I don’t think it’s cheap or expensive. But, when I look at Marathon’s chart, and the fact that Bitcoin is continuing to hold critical support, I’m leaning more bullish now than I did back in June. Of course, if Bitcoin breaks support and trades below $25k, all bets are off. That’s why we use stops – to limit risk – but I’m upgrading the rating for Marathon from hold to buy.