Is Riot Platforms a Millionaire Maker?

Riot Platforms (RIOT 0.22%) became one of the world's largest Bitcoin (BTC -1.82%) miners during the past few years, but it's generated disappointing returns for its long-term investors. Riot actually used to be Bioptix, a developer of veterinary products, before it abruptly abandoned that business model (and name) nearly seven years ago.

On Oct. 4, 2017, Bioptix rebranded itself as Riot and declared it would become a Bitcoin miner. It subsequently ordered thousands of Bitcoin miners from Bitmain, invested in other crypto companies, and expanded its business with more acquisitions. Riot's stock closed at $8.18 per share on the day of its rebranding, and it eventually soared to its post-rebranding high of $77.90 during the meme stock rally on Feb. 17, 2021.

Image source: Getty Images.

But today, Riot's stock trades at about $9.50. A $10,000 investment in its stock would have briefly blossomed to $95,232 before withering to about $11,600 today. The same investment in Bitcoin would have grown to $149,000. Let's see why Riot underperformed Bitcoin by such a wide margin -- and whether it still has a shot at generating millionaire-making gains in the future.

How fast is Riot growing?

Riot's business model is fairly simple. It constantly buys more miners, expands its mining facilities, and mines more Bitcoin. It generates most of its revenue by mining Bitcoin, and it occasionally converts some of its coins to cash.

We can measure Riot's growth through the expansion of its mining capacity; its exahash per second (EH/s), which gauges its mining efficiency; its total Bitcoins mined; and its total revenue growth. As this table illustrates, Riot rapidly expanded its mining capacity, boosted its mining efficiency, and mined a lot of Bitcoin during the past four years.

Data source: Riot Platforms.

Riot has been acquiring several smaller Bitcoin miners during the past year, and it expects its hash rate to reach 31 EH/s by the end of 2024. Analysts expect its revenue to surge 48% to $415.2 million for the full year as it ramps up its mining output.

With an enterprise value of $1.25 billion, Riot looks cheap at 3 times this year's sales. Larger competitor Marathon Digital (MARA 1.37%), which had a hash rate of 27.8 EH/s in its latest quarter, trades at 8 times this year's sales.

Why aren't investors more bullish on Riot?

Riot is still expanding, but investors seem to be losing interest in its stock for a few simple reasons. Bitcoin mining is a capital-intensive business that requires the price of the cryptocurrency to consistently grow faster than its operating costs. It's been tough to pull off that balancing act during the past two years as inflation drove up its energy costs. High interest rates also throttled Riot's gains while making it more expensive to expand its mining facilities.

Bitcoin's latest four-year halving this April, which reduces its rewards for mining in half, exacerbated that pressure by further boosting Riot's mining costs. Yet the halving also made Bitcoin more appealing by capping its available supply, so it made more sense for most investors to simply buy Bitcoin instead of a Bitcoin miner stock. That's why shares of Riot and Marathon both tumbled after the first spot price Bitcoin exchange-traded funds (ETFs) arrived this January.

Riot also repeatedly issued new shares to cover its operating expenses and stock-based compensation. Over the past seven years, its shares outstanding have risen by a whopping 5,260% and severely diluted its early investors.

Could Riot still generate millionaire-maker gains?

Riot has some issues, but investors shouldn't ignore its strengths. It hasn't generated an annual profit ever since its rebranding in 2017, but analysts expect it to turn profitable this year as Bitcoin's price stabilizes and it expands its facilities.

If Bitcoin's price soars higher during the next few years, economies of scale could kick in and drive Riot's revenue and profit higher. From 2023 to 2026, analysts expect its revenue to increase at a compound annual growth rate (CAGR) of 43%.

Riot looks cheap relative to those growth rates, but I'm not sure it can turn a fresh $10,000 investment into $1 million anytime soon. It might generate some multibagger gains as it overcomes its growing pains and near-term macro headwinds, but its future is ultimately tied to Bitcoin's price. So for many investors, Bitcoin itself might generate millionaire-maker returns a lot faster than Riot, Marathon, or other smaller Bitcoin miners over the next few years.