British crypto-miner Argo Blockchain (NASDAQ:ARBK) has seen a strong move in its stock prices in recent weeks. However, I remain bearish and indeed took advantage of a recent sharp rise in price to sell my existing position (at a significant loss).
In about a year and a half of name coverage, I’ve moved between positive, neutral, and negative stances on the company. (That in itself should perhaps have made me think more about my analytical framework). For now, I remain bearish.
At the end of last year, the company announced some important news. It sold its large mining facility in Texas for $65m (£54m), refinanced its asset-backed loans and entered into a hosting deal to service its mining machinery at the Texas facility. More details of the transaction can be found here.
The company has described them as “strategic transformational transactions” and I think that’s fair. I also see it as good news. I previously had doubts about Argo’s ability to sustain business if it did not improve its finances. In October he announcement a series of “strategic actions to strengthen the company’s balance sheet”, including the dilution of shareholders and the sale of thousands of its mining machines (“new in box”). These transactions were to provide Argo with sufficient working capital for one year.
This smells like a fire sale to me. I believe the latest transaction is good news for Argo as it strengthens liquidity and helps increase working capital for the business. But I also see it as a bad signal. Less than a year has passed since the Texas facility opened (or “energized” in corporate lingo, which in itself should have been a warning to me). It was the focus of the company’s strategy, but it has now been sold, along with thousands of machines the company bought but didn’t even take out of their boxes. Either the strategy is deeply flawed, or the management is incompetent, or both (this is my view).
Risks and potential reward
Argo has been hit like its peers by falling crypto prices, with Bitcoin (BTC-USD) down about three-fifths over the past year. If prices come back, it could help the company’s profitability.
On a half-yearly basis, the company reported a loss of £30.5m after tax, compared to a profit after tax of £7.2m at the same stage a year earlier. Rising crypto prices could help boost profitability while further declines could hurt it.
The current market cap is around $67 million. The most recent transactions “will reduce total debt by $41 million,” although I’m not sure what the company’s current net debt is. But could the stock be a bargain if Argo survives as a going concern (which the latest trades make more likely, in my view) and benefits from the next crypto price rally? I really think it’s possible.
However, the risks here are far too high for my tolerance. Crypto pricing is central to Argo’s valuation and it has no control over it. I have serious doubts about the company’s management and strategy. Further shareholder dilution to increase liquidity is an obvious risk and I also continue to view ultimate bankruptcy as a risk, although for now at least recent transactions have strengthened the balance sheet.
My Argo Parsing Errors
Given how I feel about Argo now, how did I decide to buy it?
My bet was a small sum of a few hundred dollars that I bought in part to get some skin in the game analytically, a motivation I now question.
Normally, when I invest, I look for a company that has already proven that it can be consistently profitable, even if by the time I buy it may be loss-making. Two of my biggest investing mistakes over the past two years, judging by percentage loss, clearly didn’t meet this criteria (as well as Argo, the other is kidney diagnostics company Renalytix (RNLX)). In Argo’s case, however, it came close: it recorded after-tax profits in 2020 and 2021. While 2020 profit was quite low (£1.4m), 2021 fell set at £30.8 million. I saw this as a sign of rapid growth rather than a lack of consistent long-term profitability. Going forward, I think I would look for more than a few years of profit as evidence of consistent profitability.
But I also missed or ignored other red flags. Take this insightful commentary from November on a article I wrote in May, by SA user Norman Bates at Disneyland:
In 2021, legal, professional and regulatory fees jumped 1,344% from the previous year to £1.5m. Total administrative expenses that year almost quadrupled. Admittedly, this was during a period of corporate expansion, but in retrospect, that kind of leap now feels like a red flag.
More information about fees in October and December transactions is lacking, but hopefully it will emerge at the full year level. However, Norman Bates at Disneyland’s attention to these metrics seems valuable and I should have paid more attention to them myself.
I was also a bit confused thinking that one could separate the risks of investing in crypto (which I see as a Ponzi scheme) from investing in a company with a business model that is heavily tied to crypto pricing , which I did, for example, by considering other uses for which Argo’s data centers could be used.
Valuing Argo Blockchain Stocks
It has been possible to make a lot of money on Argo over the past few weeks, with the stock doubling in a single trading day at one point and other big moves. However, I view this as speculation rather than investment.
The link to crypto pricing remains, the company’s strategy now looks questionable (and tactically seems like survival) and I have no faith in its leadership. On this basis, while a turnaround could eventually lead to a sharp rise in the stock price, I assign no value to the stocks.
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