Business: Anti-riot platform Is a Bitcoin mining and digital infrastructure company. It owns Bitcoin mining operations in Central Texas and Kentucky, and electrical switchgear engineering and manufacturing operations in Denver. It operates a Bitcoin-powered infrastructure platform. Its divisions include Bitcoin Mining and Engineering. The Bitcoin Mining segment is engaged in Bitcoin mining. The engineering department designs and manufactures power distribution equipment and custom engineered electrical products.
Stock market capitalization:$3.97B ($11.55 per share)
ownership: not applicable
Average cost: not applicable
Activists commented: Starboard is a highly successful activist investor with extensive experience helping companies focus on operational efficiencies and margin improvements. Starboard has had a total of 155 active campaigns in its history, with an average return of 23.27%, compared to the Russell 2000’s average return of 15.27% during the same period.
Starboard already has a presence in Riot Platforms and sees an opportunity to create operational and strategic value.
Riot Platforms engages in Bitcoin mining and owns and operates its own mining facilities. Vertical integration allows Riot to directly control its operations and manage input costs such as power and overhead, rather than leasing space from third-party data center operators. Riot has two business units: Bitcoin mining and engineering (designing and manufacturing power distribution equipment and custom electrical products). The company is one of the largest publicly traded Bitcoin miners with more than 1 gigawatt (GW) of developed power capacity between its facilities in Rockdale, Texas; Corsi, Texas Cana; and Kentucky. Riot also holds 16,728 Bitcoins.
although Bitcoin Riot, which is up about 130% this year as the incoming presidential administration favors cryptocurrencies, was down 24% before Starboard announced its stance, while peers have averaged returns of more than 100% so far this year. Such clear underperformance by a company with such a strong tailwind can only mean a profound lack of confidence in management – and for good reason. First, selling, general and administrative expense expenses increased out of control from $67 million in 2022 to $225 million over the past year. Despite ongoing losses and a three-year return of -54.7%, management has paid out 11.5%, 9.5%, and 32.12% of total revenue in the form of stock-based compensation over the past three years. So while the company has access to relatively cheap electricity and has the highest stock compensation per token, the company’s electricity costs per token plus cash sales and administrative expenses are among the highest in the space. As a result, the company has posted negative net operating income in each of the past three years, with its largest operating loss this year reaching $304 million. Added to this is a poor corporate governance record that includes a staggered five-member board and nepotism within the company’s top ranks. As a result, Riot trades at one of the cheapest multiples in the industry based on enterprise value to EBITDA and EV to PH/s (petahash per second, a measure of computing power).
Starboard has extensive experience in corporate governance and helping boards “professionalize” companies and optimize operations. Simply adding a Starboard representative to the board of directors would bring tremendous confidence to the market that management is on the path to creating shareholder value. Starboard is an outstanding activist with expertise in improving operating performance and profits, skills that any management team should be excited about having engaged shareholders. The company will no doubt advocate for companies to reduce unnecessarily high selling, management and administrative expenses and to right-size executive compensation to reflect business performance.
But the good news for boards and management is that the second part of Starboard’s plan could make them all rich: finding huge demand from hyperscalers or large cloud computing companies that operate data centers and provide cloud infrastructure and services. Chance. These companies, such as Amazon Web Services, Microsoft Azure and Google Cloud, have been competing to outsource and build sites to run their high-performance computing (HPC) and artificial intelligence (AI). Crypto mining facilities share several key inputs with these applications, making them excellent candidates for outsourcing capacity or converting their crypto operations, namely HPC infrastructure, access to energy (preferably renewable), energy management expertise and operational scalability among others. While the specific needs of hyperscalers are not the same as those of cryptocurrency miners, it is faster and cheaper for them to convert existing facilities within a year or two than to spend several years building their own from scratch.
Some of Riot’s competitors have already adopted this strategy, much to the delight of their shareholders. Earlier this year, another Bitcoin miner, Core Scientific, signed a deal with Nvidia-backed artificial intelligence data center startup CoreWeave. Provides 500 MW Capacity to host CoreWeave HPC operations. The arrangement has generated cumulative revenue for Core Scientific of $8.7 billion over 12 years, and the company will generate approximately $1 million in incremental cash flow for every MW contracted under the deal, with margins ranging from 75% to 80%. %, much higher than its expected profit margin. After Core Scientific first announced its partnership with CoreWeave in June, Core Scientific’s stock price soared 40% the next day and has since risen nearly 220%. Despite being the fifth-largest miner by hash rate, it is now ranked second by market capitalization. Bit Digital, Hive Digital, Hut 8, and Iren have also joined several other miners in moving to hybrid, piloting or exploring the potential to capitalize on this huge opportunity. Shares of Bitcoin mining companies that have shifted capacity to HPC have averaged a year-to-date return of 105.8%, while peers that have yet to announce doing so (Riot, Mara Holdings, and CleanSpark) have averaged a -3.4% return.
The good news for Riot shareholders is that the company is well-positioned to take advantage of the huge opportunities presented by leasing capacity to hyperscalers. The Bitcoin mining facility in Rockdale, Texas is the largest in North America, with a developed capacity of 700 megawatts. Its Corsicana, Texas, facility currently has a capacity of 400 MW and is expected to have approximately 1 GW of capacity upon completion. These factories have characteristics that are favorable to hyperscale enterprises (access to energy, proximity to major metropolitan areas, low latency, and controlled natural disaster risk). Extrapolating from the Core Scientific deal, Riot has the opportunity to generate $1 million in cash flow per megawatt through hyperscale expansion. The Corsicana facility will soon have 600 megawatts of unused capacity that can now be outsourced to hyperscalers without impacting any of the company’s existing Bitcoin mining operations. Assuming Riot retrofits just the 600 megawatts of power it is putting in at its Corsicana facility, it could increase cash flow by $600 million per year (compared to current revenue of $313 million). That number could nearly triple if Riot can convert all of the additional 1.1 gigawatts of its projected total capacity in Rockdale and Corsicana. Additionally, if the company signs an agreement like the one Core Scientific has with CoreWeave, hyperscalers will pay nearly all of the capital expenditures to build or convert these operations. Moreover, in JulyRiot acquires Block Mining Its Kentucky facility aims to increase its capacity from 60 MW to 300 MW, which may not be ideal for hyperscalers, but at least it can be used for Bitcoin.
There are certainly traditional starboard-type levers in terms of shareholder value creation, such as operational improvements, divestitures of non-core businesses and investments, and improved corporate governance. However, the core element of the company’s campaign and the message to management is simple: look around you. Riot has been criticized by rivals for failing to capitalize on the huge opportunity presented by leasing capacity to hyperscalers. Understandably, every announcement of such contracts sends share prices of peers soaring. Riot is well-positioned to take advantage of this.
Riot has come forward to say that it has spoken with Starboard multiple times, welcomes the company’s input, and looks forward to continued constructive dialogue in order to create value for all shareholders. However, it’s not unreasonable to think Starboard might be in trouble at first glance, as the company scores very low on corporate governance metrics, has only one seat on its five-person staggered board of directors at its next meeting, and recent actions suggest that The company is focused on becoming the largest vertically integrated Bitcoin miner. Shareholder activism often comes down to making an uncontroversial argument. There’s one here on the starboard side, at least for the 600 MW that’s not in use yet. Once management sees the money flowing in to enable them to grow to the massive compensation they receive, converting their other capabilities isn’t as big a problem.
Additionally, Riot recently purchased $510 million in Bitcoin Using proceeds from the convertible senior notes offering to trade on the open market reflects the fact that it may want to acquire Bitcoin today for more than its current mining capacity. There is no better way to achieve this goal than to convert some of its production capacity into a hyperscale enterprise that can generate strong and stable cash flow far beyond its normal operations. If Riot was really so determined to own Bitcoin, it could use some of its excess cash flow to acquire some of the Bitcoin it would otherwise mine. Management must decide if Riot wants to be a professionally run company that optimizes value for all participants, or if it just wants to be a Bitcoin miner. If management decides the latter, it would not only be choosing to give up billions of dollars in value, but also be on the path to a potentially distracting and costly proxy battle with Starboard over the next two years, and ultimately management The layer may take action and achieve nothing. We don’t think that’s going to happen, as there seems to be a lot of room for compromise here.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in activist 13D portfolios. Riot Platforms is owned by the fund.
