Investor Alert: Starbucks' Legal Challenges Raise Questions About Stock Viability

Earlier this month, three Starbucks Corporation (SBUX) customers, Maria Bollinger, Dawn Miller, and Shunda Smith, filed a $5 million class-action lawsuit alleging discrimination in the U.S. District Court for the Eastern District of California against SBUX. Their argument centered around SBUX charging extra for non-dairy milk and unfairly targeting individuals with lactose intolerance – a condition that affects their ability to consume dairy.

The lawsuit alleges an "excessively high" fee, specifically a surcharge of $0.50 to $0.80, on beverages at SBUX that offer non-dairy and lactose-free options such as soy, almond, coconut, and oat milk. The Americans with Disabilities Act (ADA) considers lactose intolerance, a condition that impacts 30 million to 50 million Americans, as qualifying for disability status.

Plaintiffs contended that SBUX violated their rights under the ADA and California Unruh Civil Rights Act - an act prohibiting businesses from discriminating against state residents based on age, race, sex, and disability, among other criteria, because they charge extra for plant-based milk in their beverages.

However, an SBUX spokesperson emphasized that domestic customers indeed enjoy non-dairy options without any additional charges, stating that "In U.S. Starbucks stores, at no additional cost, customers can add up to four ounces of non-dairy milk to hot or iced brewed coffee or tea, cold brew and Americano beverages."

Such controversy could corrode consumer trust and loyalty, precipitating decreased sales and profitability. Should an indictment of violating anti-discrimination laws befall SBUX, substantial financial penalties combined with brand image damage are probable. These factors could significantly influence shareholder value over the long term.

Safety Concerns Threaten Reputation and Consumer Trust

Apart from the abovementioned conflict, the company is also grappling with other challenges. This month, the federal safety agency reported that it is recalling over 440,000 Nestlé S.A. (NSRGY)-manufactured SBUX-branded mugs sold during the winter holidays. The action follows numerous user complaints of burns or lacerations.

The U.S. Consumer Product Safety Commission stated that microwaving or filling the mugs with extremely hot liquid caused them to overheat or shatter, presenting burn and laceration risks

SBUX-branded mugs' recall due to safety hazards significantly threatens the company’s reputation and consumer trust. The incident could result in potential legal and financial repercussions and tarnish the company's image, consequently affecting future merchandise sales and its bottom line.

The Fallout From Controversies Over International Conflicts

Since Israel's military offensive in Gaza, global protests and grassroots boycott campaigns have impacted SBUX. After the company sued its workers' union over a social media post in October, an activist called to boycott SBUX products.

The chain accused that by using their company name and logo on X (previously Twitter) to express solidarity with Palestinians, Workers United had violated its trademark. In response, Workers United filed its court document, accusing SBUX of defamation, specifically suggesting that the union endorses terrorism and violence.

Due to the unresolved disagreement, SBUX found itself targeted by both pro-Palestine and pro-Israel protests. CEO Laxman Narasimhan acknowledged this in a year-end letter published highlighting vandalism instances experienced in global cities and within U.S.-based SBUX stores.

Denying political affiliations, SBUX rebutted social media rumors suggesting ties to governmental or military operations.

The escalating protests and boycotts could threaten the brand's reputation, sales, and consumer trust. These challenges could also affect SBUX's financial standing and future viability as it navigates the complexities of international conflicts and societal pressures.

Starbucks' Sales Woes and Investor Concerns

In its fiscal 2024 first quarter release, SBUX reported that global same-store sales had only risen by 5% year-over-year in the three months leading up to January. The company also downgraded its guidance, projecting an increase between 4% and 6% in global same-store sales for the full year of 2024.

On an earnings call, Narasimhan asserted that the company observed a negative impact on its business in the Middle East. He added that since mid-November, the chain's U.S. sales have also lagged, partly due to public "misperceptions" about SBUX's stance on the conflict.

Some analysts, however, attribute the sales slowdown to a broader decline in sentiment among U.S. consumers and an economic recovery stall in China – its second-largest market with approximately 6,500 outlets. They point out that others noticed this trend coincided with a new winter menu launch, which could have underwhelmed customers.

Furthermore, the Frappuccino provider recently admitted to an unsuccessful beta test of their non-fungible token loyalty website named Starbucks Odyssey. Concurrently, Executive Vice President and CFO Rachel Ruggeri chose to sell 3,221 shares on March 4, 2024.

Over the past year, Ruggeri sold 5,246 shares without making any purchases in the SBUX stock. Her transaction history reveals consistent selling patterns with no recorded insider buys within that period. On the other hand, ten insider sales occurred at the company during this same timeframe, indicating an overarching trend among its insiders.

Bottom Line

The coffee company has been committed to ethically sourcing and roasting high-quality arabica coffee since 1971, and it stands today as the world's premier specialty coffee roaster and retailer, with over 38,000 stores globally. However, shares of SBUX have plunged 4.8% over the past month.

While the company's reputation and legal standing might improve in the future, its present fundamentals appear weak. Thus, it could be wise to wait for a better entry point into the stock.

Cracker Barrel (CBRL) Dividend at Risk: A Close Look at Financial Performance

With a market cap of roughly $1.46 billion, Cracker Barrel Old Country Store, Inc. (CBRL) has established itself as a major player in the restaurant industry. Its establishments feature restaurants paired with gift shops, serving breakfast, lunch, and dinner with dine-in, pick-up, and delivery options.

However, the company is not only popular for its iconic dining experience but also for its commitment to returning value to shareholders through consistent dividend payouts. Last month, CBRL declared a quarterly dividend of $1.30 per share, payable to its shareholders on April 12, 2024.

Its annual dividend of $5.20 translates to a staggering 7.89% yield on the prevailing price level, while its four-year average dividend yield is 4.13%. Over the past three years, CBRL’s dividend payouts have grown at a CAGR of almost 26%.

Despite the allure of the company's annual dividend yield among investors seeking steady dividend income, its dividend payout ratio of approximately 105.56% raises notable concerns, particularly in light of the declining trend in its earnings per share since reaching a peak in early 2021.

CBRL allocated 94% of its cash flow toward dividends and distributed over 116% of its profits in the past year to shareholders. These metrics reflect the percentage of earnings that a company distributes as dividends, and in CBRL’s scenario, these figures are notably elevated.

Typically, traditional dividend-paying stocks strive to maintain a payout ratio closer to 75% of earnings to ensure sufficient resources for sustaining and improving operations. However, CBRL’s notably high payout ratio raises concerns about its dividend sustainability.

In its latest financial results, the company reported revenue of $935.40 million, revealing a marginal year-over-year increase, while its adjusted net income and adjusted earnings per share plunged 13% and 13.1% year-over-year, reaching $26.53 million and $1.19, respectively.

As of January 26, 2024, CBRL’s cash and cash equivalents stood at $12.60 million, reflecting a substantial decline of 74.5% from $49.40 million as of January 27, 2023.

Commenting on the company’s latest quarterly results, CBRL’s President and Chief Executive Officer, Julie Masino, noted that despite margin pressures, there was encouragement from the improvement in traffic trends during the quarter. Masino attributed this improvement to investments in labor and advertising, alongside a focus on enhancing the guest experience.

Furthermore, Masino highlighted ongoing progress in the strategic transformation efforts, with teams actively engaged in initiatives to enhance relevancy, deliver beloved food and experiences to guests, and drive profitability growth.

However, despite the company's endeavors to enhance profitability growth, its current profitability levels continue to lag behind industry norms. For reference, the stock’s trailing-12-month net income and levered FCF margins of 2.43% and 1.09% are 48.8% and 80.4% lower than the 4.76% and 5.53% industry averages, respectively.

In its fiscal 2024 outlook, the company anticipates total revenue between $3.50 billion and $3.60 billion. Expansion plans include opening two new CBRL stores and 9 to 11 new Maple Street Biscuit Company units. Capital expenditures are estimated to be between $120 million and $135 million.

Meanwhile, Wall Street analysts foresee a 29.7% year-over-year drop in its EPS in the upcoming quarter, while revenue is expected to be $836.92 million.

Bottom Line

Despite CBRL’s highly appealing annual dividend yield and growth trajectory in dividend payouts over the past years, the company's notably elevated payout ratio of over 100% raises significant concerns about its dividend sustainability.

While CBRL's latest financial results show slight revenue growth and demonstrate efforts to improve traffic trends and enhance guest experiences, its profitability remains below industry norms.

Moreover, the company has witnessed a declining trend in earnings per share. With CBRL dedicating most of its earnings toward dividend payments, the dropping earnings per share cast a shadow of doubt on the company’s ability to maintain its dividend payments at the current price level.

Furthermore, the expansion initiatives and associated capital expenditures in fiscal 2024 highlight the company’s goals to invest in its future growth. While such investments can enhance revenue and profitability, they also impose short-term financial obligations and cash outflows.

The expansion investments, including opening new stores and units, require substantial financial resources, potentially elevating operational expenses and limiting the available funds for dividend payments.

Overall, the combination of substantial capital expenditures, dropping liquidity levels, declining earnings per share, and ongoing operational costs associated with expansion plans heighten the vulnerability of CBRL’s future dividend payments.

That said, considering the possibility of dividend cuts in the near term, investors seeking classic dividend-paying stocks could keep a close eye on the shares of CBRL for a more favorable entry point.

Google’s AI Debacle: A Red Flag for Investors Eyeing Sell Signals?

Since the debut of OpenAI’s ChatGPT in November 2022, numerous tech companies have been swiftly advancing to develop comparable, if not superior, versions of such conversational AI models. Among them, tech titan Alphabet Inc. (GOOGL) has emerged as a prominent player.

Utilizing its extensive resources and employing top-tier talent to explore the frontiers of AI capabilities, GOOGL unveiled its largest and most capable AI model, Gemini (formerly known as Bard), in December last year.

This expansive language model consists of three variants: Gemini Ultra, representing its largest and most proficient category; Gemini Pro, designed to address a wide range of tasks across various scales; and Gemini Nano, tailored for specific functionalities and compatibility with mobile devices.

GOOGL’s CEO Sundar Pichai said this new era of models signifies one of the company's most significant science and engineering endeavors. He expressed genuine excitement about the future and the opportunities Gemini will bring to individuals worldwide.

However, despite the CEO’s enthusiasm, Gemini failed to garner the same level of traction as ChatGPT. According to web analytics company Similarweb, Gemini currently ranks as the third most popular AI chatbot, trailing significantly behind ChatGPT in terms of traffic.

To make matters worse, Gemini has encountered multiple controversies over the last month, resulting in a notable downturn for GOOGL. According to the Gemini chatbot, one should never misgender a person, even if it could prevent a nuclear apocalypse.

This stance was revealed in response to a hypothetical question posed by a popular social media account, which asked if misgendering Caitlyn Jenner, a prominent transgender woman, could prevent such a catastrophe. Gemini’s “woke” response to the post received major criticism from social media users.

Additionally, the controversy surrounding Google’s Gemini intensified as its image-generating platform was slammed for producing racially inaccurate depictions of historical figures, occasionally substituting images of White individuals with those of Black, Native American, and Asian descent.

Tesla, Inc. (TSLA) CEO Elon Musk expressed concern over these “woke” responses, particularly emphasizing the widespread integration of Gemini across GOOGL’s products and YouTube.

Musk tweeted about a conversation with a senior GOOGL executive, who informed him it would take a few months to address the issue, contrary to earlier expectations of a quicker resolution.

While GOOGL has issued several apologies and halted the use of Gemini’s image-generating platform, a former GOOGL executive disclosed that investors are expressing profound frustration as the scandal involving the Gemini model evolves into a tangible threat to the tech company.

On the other hand, CEO Sundar Pichai reassured stakeholders, affirming that the company is actively working “around the clock” to address the issues with the AI model. Pichai condemned the generated images as “biased” and “completely unacceptable.”

Furthermore, GOOGL recently introduced an update to Gemini that allows users to modify inaccurate responses and provides them with increased control over the platform. Reportedly, GOOGL experienced a loss of approximately $90 billion in market value last month, fueled by the controversy surrounding Gemini.

Also, GOOGL made history as the first company to face a hefty fine for its AI training methods. French regulators imposed a penalty of approximately $270 million on the tech giant. The regulatory authority stated that the company breached a pledge by using content from news outlets in France to train its generative AI model, Gemini.

Bottom Line

As GOOGL grapples with the fallout from Gemini-related controversies, its reputation among investors has taken a significant blow. The company’s AI chatbot faced enhanced backlash from individuals and prominent public figures such as Elon Musk.

Sergey Brin, the co-founder of GOOGL, acknowledged Gemini's historical inaccuracies and questionable responses. He stated that Google “definitely messed up on the image generation” and attributed the issue to insufficient testing.

However, he highlighted that GOOGL is not alone in grappling with challenges. Various AI tools, including ChatGPT and Elon Musk’s Grok services, struggle to generate accurate results. He noted that these tools sometimes produce peculiar responses that may seem politically skewed.

Despite these challenges, Brin maintains confidence in GOOGL’s position, emphasizing his belief in the tech company’s capabilities to adapt and innovate its business models.

Furthermore, GOOGL continues to lead the way in the field of AI. Talks between GOOGL and Apple Inc. (AAPL) about integrating Gemini’s generative AI technology with iPhones have sparked a significant surge in the stock prices of both companies.

A partnership with AAPL would give GOOGL and Gemini a reassuring vote of confidence, particularly given the recent controversies surrounding its “woke” chatbot and the generation of inaccurate images.

Wedbush analyst Scott Devitt sees the potential deal as a validation moment for GOOGL’s generative AI positioning. The firm rates GOOGL “outperform” and has a 12-month price target of $160. Devitt emphasized that this collaboration represents a significant opportunity for GOOGL to integrate into the AAPL ecosystem.

In conclusion, while GOOGL faces challenges and scrutiny due to controversies surrounding Gemini, the company continues demonstrating determination to adapt and thrive.

Furthermore, talks with AAPL regarding the potential integration of Gemini's technology signal promising opportunities for GOOGL and its generative AI model. Consequently, in light of this significant development, adopting an entirely bearish stance on GOOGL might not be prudent. Thus, investors could closely monitor the stock for potential gains.

ADBE 2024 and Beyond Outlook: Overcoming Short-Term AI Hurdles for Long-Term Success

Adobe Inc. (ADBE), widely known for its multimedia and creativity software for content creation, photo, and video editing, recently reported financial results for the first quarter of fiscal year 2024, which ended on March 1, 2024. It posted revenue of $5.15 billion, beating analysts’ estimate of $5.15 billion. This compared to revenue of $4.66 billion in the previous year’s quarter.

Adobe achieved record revenue in the first quarter, showcasing solid momentum across its business segments. Digital Media segment revenue was $3.82 billion, up 12% year-over-year. Creative revenue increased to $3.07 billion, representing 11% year-over-year growth, and Document Cloud revenue came in at $750 million, representing 18% year-over-year growth.

Moreover, ADBE’s Net new Digital Media Annualized Recurring Revenue (ARR) was $432 million, exiting the quarter with a Digital Media ARR of $15.76 billion. Creative ARR increased to $12.78 billion, and Document Cloud ARR rose to $2.98 billion. Also, revenue from the Digital Experience segment was $1.29 billion, an increase of 10% from the same period last year.

Furthermore, the company’s non-GAAP operating income grew 15.8% from the year-ago value to $2.47 billion. Its non-GAAP net income rose 17.2% year-over-year to $2.05 billion. Also, Adobe reported non-GAAP net income per share of $4.48, compared to the consensus estimate of $4.38, and up 17.9% year-over-year.

Adobe’s cash flows from operations came in at $1.17 billion for the quarter. In addition, its enterprise strength drove the growth of Remaining Performance Obligations (RPO) by 16% year-over-year.

 

 

Adobe's remarkable first-quarter results and record RPO demonstrate robust uptake of its innovative products and services by customers. As a result of its solid trajectory of growth and profitability, the company declared a new share buyback program worth $25 billion. It underscores ADBE’s ongoing commitment to returning capital to its shareholders.

Bleak Second Quarter 2024 Guidance

While its first-quarter results beat estimates, Adobe presented a weak outlook for the second quarter of fiscal 2024 and opted not to update on full-year expectations. For the current quarter, ADBE anticipates total revenue ranging from $5.25 to $5.30 billion. The company expects a new Digital Media net new ARR of approximately $440 million, and Digital Media segment revenue is projected between $3.87 billion and $3.90 billion.

ADBE projects Digital Experience segment revenue and Digital Experience subscription revenue of $1.31-$1.33 billion and $1.165-$1.185 billion, respectively. The company also foresees non-GAAP EPS reaching between $4.35 and $4.40.

Challenges and Opportunities in the AI Landscape

ADBE has undergone a remarkable metamorphosis in the last decade, converting its desktop-based software such as Photoshop, Premiere Pro, Illustrator and Acrobat into cloud-based services. The company further enriched this ecosystem by incorporating an array of marketing, e-commerce, and even analytics services.

The Digital Media segment, encompassing Creative Cloud and Document Cloud, however, grappled with macro and micro challenges specific to the media industry. It faced currency headwinds and enhanced competitive pressure from Figma in the software User Interface (UI) market.

ADBE’s disappointing failure to acquire Figma for its potential was substantial. The Creative Cloud, in near-term scenarios, could have seen boosted revenue, and a significant competitor would have been eliminated. Contrarily, ADBE found itself paying a hefty $1 billion termination fee directly to Figma upon antitrust regulators thwarting the deal.

In an effort to counterbalance the aforementioned loss, the company is vigorously expanding its generative AI platform, Firefly. With Firefly’s assistance, designers can generate photos, videos and 3D models using minimal text-based prompts. Furthermore, it accelerates various tasks throughout both Digital Media and Digital Experience ecosystems.

Over the past year, Firefly popularized ADBE as a stock in the AI buying frenzy. However, it has yet to increase its digital media sales significantly. Exacerbating matters, ADBE still grapples with another probe from the Federal Trade Commission (FTC) in relation to its subscription cancellation policies.

During the fiscal year 2023, several macro headwinds impacted the company’s smaller Digital Experience segment, which is responsible for managing its other enterprise-facing cloud services. Additionally, currency headwinds hindered a percentage point of this segment's revenue growth.

CEO Perspective and Strategic Focus

Adobe is making noticeable progress across existing products and mobile tools and even introducing new innovative product offerings. An example is AI-powered Enhance Speech, an innovative tool that automatically dubs a video into a language selected by the user. It is an impressive addition to ADBE’s expanding suite of products and services.

Also, ADBE recently launched an AI assistant in its Reader and Acrobat applications that can produce summaries of and answer questions about PDF documents.

The company has clarified its focus on acquiring an extensive user base. The concept underpinning this strategy is that robust customer acquisition and retention will enable ADBE to monetize its users over time progressively. As a pioneer in the software-as-a-service (SaaS) business model, ADBE maintains fidelity by incorporating AI with traditional methodologies.

Working actively, ADBE is embedding generative AI across its entire product portfolio. It has already introduced this capability in Photoshop and Illustrator. Moreover, demonstrating a commitment to innovation, it plans to release a text-to-video creation product by the end of the year. Concurrently, the company has previewed an upcoming music generator product.

Chief Financial Officer Dan Durn mentioned that numerous projects are slated for release in the forthcoming months. Further, he emphasized that ADBE has merely initiated the process of capitalizing on its generative AI technology.

Moreover, a crucial aspect of the company’s latest earnings call highlighted Adobe CEO Shantanu Narayen's discussion on differentiating between experimentation and monetization within its platforms. Adobe is still in the process of determining which features and tools will resonate with users. Adobe needs to avoid investing billions in tools that either go unused by users or don’t justify future price increases.

The main challenge for Adobe lies in profit generation from AI. As a subscription-based company, Adobe must increase its customer base and revenue per user to support rising capital expenditures. This challenge is akin to what platforms like Netflix, Inc. (NFLX) face, where they must enhance their services’ value through quality content to justify price hikes.

During Adobe's latest earnings call, a shift in momentum was noted, along with the recognition that while new AI-powered applications have significant growth potential, this doesn’t guarantee an immediate impact on its short-term results.

Analysts' Changes to Price Targets

Stephen Bersey, an analyst at HSBC, has cited concerns over AI and noted disappointing guidance. Consequently, he reduced ADBE's firm price target from $557 to $511, a decision aligned with his unchanged hold rating on the shares. The investment company perceives ADBE’s competitive moat as being potentially threatened by AI.

Reportedly, some employees of the company also grapple with the threat of AI. In July, news emerged that a significant number of ADBE’s workforce perceived AI as an "existential crisis" for numerous designers.

Barclays reduced its price target for ADBE’s shares from $700 to $600 and maintained an overweight rating for the stock. Analysts stated that they anticipate the stock will recover and “would be buying this dip because pricing is masking the underlying strength in Creative Cloud.”

Further, JP Morgan cut the price target on ADBE from $600 to $570, maintaining a Neutral rating. Baird also slashed the price target on ADBE stock from $590 to $525, and its analyst Rob Oliver maintained a Neutral rating on the stock. Meanwhile, UBS analyst Karl Keirstead reiterated his Neutral rating on the stock and cut the price target from $600 to $540.

On the contrary, Brad Zelnick, an analyst at Deutsche Bank, reiterated his Buy rating on ADBE stock and set a price target of 650. He asserts that the emergence of competitive generative AI tools for images and video will benefit ADBE. As per Zelnick, creators will continue to require editing tools for these images and videos; hence, their indispensability remains intact.

Moreover, Mizuho Securities analyst Gregg Moskowitz predicts a second-half-yearly commencement for the company to profit from new product introductions and the growth in generative AI. With a price target set at 680, he maintained his Buy rating on ADBE stock.

Bottom Line

ADBE reported better-than-expected results for the first quarter of the fiscal year 2024; however, it issued weak guidance for the second quarter. The design software company expects earnings growth of 12% year-over-year and sales increase of 10%. That would be its third straight quarter of declining earnings growth and second consecutive quarter of slowing sales.

Investors and analysts are wondering when Adobe will see a boost from its innovations in generative AI. Some analysts raised concerns about the health of its Creative Cloud business and the pace of AI monetization. Also, the company is assumed to face a growth problem caused by a challenging macroeconomic climate and fierce competition from Figma, Canva, and other forms, among other factors.

Although Adobe’s new AI-powered product offerings have substantial long-term potential, it’s important to note that their impact on short-term results may not be immediate.

Bitcoin Halving: Marathon Digital’s $1 Billion War Chest Fuels Growth Plans

Marathon Digital Holdings, Inc. (MARA), a prominent player in supporting and securing the Bitcoin ecosystem, boasts a solid financial position. As of February 29, 2024, it had nearly $1.5 billion in unrestricted cash and cash equivalents and bitcoin. This substantial financial firepower plays a crucial role in enabling the company to execute its expansion strategy with agility and effectiveness.

Acquisition of 200MW Bitcoin Mining Data Center

On March 15, 2024, MARA finalized a deal to purchase Applied Digital Corporation’s Bitcoin mining data center in Garden City, Texas. The data center, which has a capacity of 200 megawatts (MW), will be acquired for $87.3 million, translating to roughly $437,000 per megawatt. The acquisition will be funded entirely through cash reserves from Marathon’s balance sheet.

The Bitcoin mining data center in Garden City, Texas, is located adjacent to a wind farm and is predominantly powered by renewable energy. The site, constructed and energized in 2023 with a workforce of about 25 employees, currently converts around 100 megawatts (c. 4.5 exahash of miners) into economic value through Bitcoin mining.

With the acquisition of this data center, MARA will take direct ownership of its current on-site operations and plans to expand by another 100 megawatts in 2024, totaling 200 megawatts dedicated exclusively to its Bitcoin mining operations.

This move provides Marathon with secure ownership of its operations and expansion opportunities. It also anticipates a 20% reduction in the cost per coin of its current operations at the site. Subject to customary conditions, the transaction is set to close in the second quarter of 2024.

The recent transaction marks Marathon’s second significant acquisition of Bitcoin mining data centers in the past four months, further bolstering its self-owned and operated megawatts to 54% in its Bitcoin mining portfolio. Before the acquisition of its first two data centers, which closed in January, MARA’s Bitcoin mining portfolio included 584 megawatts, with 3% residing on sites directly owned and operated by the company.

With this strategic acquisition and the planned expansion of the site in 2024, Marathon’s Bitcoin mining portfolio is set to increase to 1.1 gigawatts, with 54% under its direct ownership and operation, all of which are diversified across eleven sites on three continents. As a result, MARA will directly own and operate more megawatts than it had in its entire Bitcoin mining portfolio in December 2023.

In January this year, MARA finalized the acquisition of two operational Bitcoin mining facilities in Texas and Nebraska from subsidiaries of Generate Capital, PBC. Under the deal, the company paid around $179 million in cash from its balance sheet for approximately 390 MW of mining capacity. It also terminated rival Hut 8 Corp’s (HUT) involvement in overseeing the facilities.

Preparations for the Bitcoin Halving

Marathon Digital’s timing in acquiring the Bitcoin mining data center, located next to a wind farm with a capacity of 200 MW, is strategic, coinciding with its preparations for the upcoming Bitcoin halving, which is expected around April 20. This event, slashing per-block rewards by half from 6.25 BTC to 3.125 BTC, can strain smaller and less efficient miners with higher energy costs and limited capital access.

Miners with higher electricity costs or lower-efficiency machines “will have a difficult time mining profitably post-halving,” said Ethan Vera, Luxor Technology’s Chief Operating Officer. “Many companies are stuck in power contracts, or benefit from top line gross revenue and as such might continue to mine despite not being profitable. Companies' balance sheets will determine how long they can survive doing that.”

MARA, an already leading player in the mining space, reported an energized self-mining hash rate of 28.7 exahashes per second (EH/s) at the end of February 2024.

During last month’s earnings call, Marathon executives said they would use its balance sheet, comprising roughly $1 billion worth of unrestricted cash and bitcoin, to approximately double its hash rate to 50 EH/s by the end of 2025. In 2024, the company plans to increase its hash rate to nearly 35 to 37 exahash.

Moreover, MARA is preparing aggressively for the next Bitcoin halving with plenty of cash in hand.

“We have the need for more capacity, we are reaching that limit now as we speak but we will continue to be acquisitive in this space,” Marathon’s chief executive, Fred Thiel, said in an interview on Bloomberg Television. “That has a direct impact on our cost to mine, which lowers our break-even point.”

Marathon Digital is enhancing its infrastructure and increasing the number of its mining devices to keep costs low after the halving event, which will significantly reduce its revenues. The company estimates that the break-even point, where revenue covers the cost of 1 BTC after halving, will be $43,000. 

Fred Thiel said, “By simple calculation, if the industry average breakeven point was previously around $23,000 per Bitcoin, it will now be around $43,000.” Thiel mentioned that some miners will lose their profitability, and perhaps some will have to consider discontinuing their mining activities.

The latest announced purchase is consistent with Marathon’s proactive approach of scaling up its operations before the upcoming bitcoin halving, slated in April, which aims to alleviate potential financial pressures and capitalize on the opportunities in the market.

MARA is not the only mining company preparing for the bitcoin halving. Companies like Riot Platforms, Inc. (RIOT) and CleanSpark, Inc. (CLSK) are also making substantial investments to increase their mining capacities. For instance, last month, Riot Platforms purchased 31,500 next-generation M60S miners from MicroBT for $97.40 million.

On the other hand, CleanSpark acquired three Bitcoin data centers in Mississippi, indicating a strategic move to bolster its mining infrastructure. Hut 8, led by CEO Asher Genoot, has outlined growth plans that focus on cost-effective scaling strategies.

Bottom Line

MARA, one of the largest U.S. bitcoin mining companies, reported outstanding financial and operational results for the fourth quarter and fiscal year ended December 31, 2023. For the full year, Bitcoin production rose 210% year over year to a record 12,852 BTC. The company’s revenues grew 229% from the prior year to $387.50 million in 2023.

Furthermore, Marathon’s net income grew to a record of $261.20 million, or $1.06 per share, from last year’s net loss of $694 million, or $6.12 per share. Also, its adjusted EBITDA improved to $419.90 million from a loss of $543.30 million in 2022.

Marathon Digital, with a combined balance of unrestricted cash and cash equivalents and bitcoin of nearly $1.5 billion as of February 29, continues to build liquidity on the balance sheet to capitalize on strategic opportunities, including industry consolidation. Recently, the company announced buying a 200 MW capacity Texas Bitcoin mining facility owned by Applied Digital for nearly $87 million in cash.

Along with taking direct ownership of its current operations at the site, the company added Marathon intends to grow its presence at the facility by 100 MW by the end of 2024. This planned purchase is consistent with MARA’s strategy to scale up its operations ahead of the next bitcoin halving event, slated for around April 20.

Also, in January, Marathon Digital closed the acquisition of two Bitcoin mining facilities in Texas and Nebraska from subsidiaries of Generate Capital, PBC. It paid around $179 million for 390 MW of capacity.

As the halving event is expected to put financial stress on companies in the mining sector, notably smaller, less-efficient miners with high energy costs and limited capital access, the recent mergers and acquisitions (M&A) emphasize MARA’s consistent efforts to mitigate potential challenges and capitalize on several opportunities in the market.

With MARA’s strong financial position enabling the company to execute its expansion strategy effectively, investors could consider buying this stock now.