Summary RIOT is on the verge of a critical breakdown, or the start of a new bullish leg. The valuation has deteriorated significantly, but revenue estimates are looking up. I'm sticking with neutral, with the caveat that the stock could be a good long or short depending on what happens. Bitcoin stocks started the year unbelievably hot. As we all know, risk-on behavior has dominated 2023 just as strongly as risk-off behavior dominated last year. However, after some really big runs in growth-oriented stocks, some are way overextended. I've covered Bitcoin miner Riot ( RIOT ) a few times, most recently in September , when I cut it from buy to neutral. A lot has happened since then, and it's worth revisiting given Bitcoin's strong performance this year, as well as Riot itself. Critical test ahead We'll begin with the chart, as always, and the most critical thing here is the support level I've drawn in. We'll do a review of the technical situation, but just know that all bets are off if the stock fails the ~$10 level. StockCharts The zone of support is roughly $10.00 to $10.50, and so far, it's been tested a bunch of times in the past couple of months. We're right there again with a Monday close of $10.24, and so long as it holds, there's upside potential. If it fails $10, cut your losses and get out. On the side of the bears, we have the 20-day exponential moving average making a bearish cross of the 50-day simple moving average. That doesn't mean the stock cannot overtake it again and turn the 20-day EMA higher, but this has the look of the beginning of a larger bear move. The PPO is right at the centerline, which is fine during a consolidation, but we need to see it turn higher quickly. We have the 14-day RSI at just above 40, which is again okay so long as it turns higher soon. All in all, the chart on this one is simple. Either we get a bounce off the support zone, or it breaks down. Either way, I think a big move is coming; which direction is yet to be determined. Now, something I always do with Bitcoin-related stocks is compare their performance with Bitcoin itself. As we can see, Riot has obliterated Bitcoin this year, beating the coin by a staggering 94%. StockCharts That's awesome if you've owned Riot during this time, but it also means Riot's value relative to Bitcoin has suffered immensely; more on that in a bit. Speaking of Bitcoin, we see the coin in a very similar situation to Riot from a technical perspective. StockCharts We see the coin hitting a critical zone of support (just like Riot), and it must hold. If it doesn't, there could be significantly more selling. I'm in the same boat with Bitcoin as I was with Riot; if support holds, there's meaningful upside potential. If not, well, you know. One more point on Riot before we move off the technicals, is that the stock is far less shorted today than it has been in the recent past. YCharts Short interest is still decent at 13.5%, which is about half of the peak from last year. Even earlier this year, the stock was ~20% shorted, so there are a lot fewer bearish bets. That will reduce potential volatility on any move up or down, and this is certainly not a short squeeze play. Things are looking up... maybe Let's turn our attention to the fundamentals, which are actually starting to look better after some really rough months last year. We'll kick things off with the top line, which was basically cut in half between the start of 2022 and the early part of this year. Seeking Alpha However, both this year and next year have seen estimates move off the bottom, and if the company has seen the worst of Bitcoin bear market, the stock could have huge upside over time. A lot has to go right for that to occur - not least of which is Bitcoin itself trading higher - but the estimates look like they've bottomed. The problem with miners - and why their shares have been absolutely destroyed in the past year or so - is that margins have deteriorated rapidly, and in huge magnitudes. This is a chart Riot provided in an investor presentation, and it actually does a great job of helping us understand what drives margins for a Bitcoin miner. Investor presentation You can read the slide but the point here is that in recent quarters, profitability has fallen off a cliff for Bitcoin miners. Many are operating (and mining) at a loss, and there hasn't been a lot of optimism that would change. TIKR You can see the damage for Riot above, as its gross margins fell from 2021 levels in the 60s to just 5.2% in the December 2022 quarter. No miner can operate with that kind of gross margin profile, and Riot is no different. The March quarter was a lot better, but nowhere near good enough. This is the number to watch going forward, and much of it depends upon Bitcoin's price action. That's why it pays so well to watch the Bitcoin chart for clues as to how Riot and others' margins will likely perform in the coming quarters. Right now, margins are a huge concern. Let's value this thing I'm leaning ever so slightly to the bullish side on the charts. I mentioned Riot and Bitcoin are facing critical price support tests, so until those fail, I'll lean bullish. It's a lean, though; I'm not exactly pounding the table. However, when we throw in the margin situation, and the valuation that we'll look at below, Riot's outlook is pretty murky. Below we have the stock's price-to-sales ratio since the beginning of 2022. Right now, shares are 4.3X forward sales, which is ahead of the average of 3.3X. TIKR Now, it could be that investors have bid up the stock in anticipation of higher revenue, or it could be that the stock is just overvalued. We won't know the answer to that until Bitcoin and/or Riot either start a new rally, or break down below critical price support. But is the P/S ratio making me more bullish? Absolutely not. Remember this chart from above? StockCharts Riot's relative performance against Bitcoin is great if you've owned it, but this cannot persist. A 94% outperformance in a five-month period is unsustainable, and given the weight of all the evidence we've looked at here, I'm sticking with my neutral rating. Riot's fate is tied to whether or not Bitcoin can bounce off the ~$25k level, and right now, I'm not so sure. If it does, that's great, but if Bitcoin breaks down, Riot will follow, particularly given the valuation. So here's the gameplan; I'm going to sit tight on Riot and see if it either starts to rally, or breaks down. If it breaks down, you can short it under $10. If it rallies on a strong up move in Bitcoin, there's a lot of upside so long as it breaks out from its current consolidation range. This is one where patience could potentially save you a lot of money, and that's the route I'm taking.
