Marathon Digital: Look Out Below If Bitcoin Breaks Down (NASDAQ:MARA)

Bitcoin (BTC-USD) has been an absolute rocket ship this year. This, despite a pretty sizable consolidation that is underway since mid-April. Of course, that sort of action takes a number of stocks with it, including those that mine Bitcoin for a living.

One such name is Marathon Digital (NASDAQ:MARA), which is also up enormously this year, but has been stuck since mid-April. The last time I visited Marathon, I placed a buy rating on the stock as there was a bullish setup identified in the chart. That setup eventually invalidated, and the stock ended up going a lot lower. That’s why we use stops, and it’s a reminder that all we can do is try and put the odds in our favor.

Today, I’m on the fence. The stock has been in a very tight range since mid-April, which – uncoincidentally – started when Bitcoin began consolidating. I think Marathon looks okay, but I’m avoiding taking a position until it breaks out of the range.

Big consolidations breed big moves

The consolidation for Marathon is now almost two months old, and you can see it’s been extremely tight. The range is roughly $8.50 to $10.75, and we find the stock towards the bottom end of that range after Monday’s action.

While this chart is one of blatant indecision, I will say the PPO has reset to the centerline, and the 14-day RSI remains above 40, bouncing each time we see that number. Those are bull market behaviors, so if I’m leaning one way, it’s cautiously bullish.

Bitcoin and Bitcoin-related stocks go through boom and bust cycles often, and I expect the move out of this consolidation range to be massive. That would be true just from the long consolidation, but this stock has about a quarter of the float short as well. That will exacerbate the next move, whether it’s up or down, so buckle up if you have a position.

The bottom panel has Marathon’s stock price relative to Bitcoin, which you can see goes through its own boom and bust cycles. Marathon lost ~74% of its value relative to Bitcoin late last year, but has gained 75% (from a very low base) thus far in 2023. That means investors are paying more today for Marathon’s Bitcoin than they did in January. I still think the stock looks cheap relative to Bitcoin, but it’s one more thing to watch. Overall, I’m cautiously bullish on the next move.

Things get a little trickier when we look at the coin itself, however.

Bitcoin is putting in a pretty ugly descending triangle, and the momentum indicators are unequivocally weak. There’s a critical zone of support just over $25k, which is where we are right now. If this breaks to the downside, look out below as we could see a quick test of $21k in short order. If that happens, everything I said about Marathon rallying out of its consolidation is null and void. If Bitcoin breaks down, just get out of Marathon or whatever else Bitcoin-related you own.

That sounds pretty dire, and it’s because I see this chart as a big risk. To be clear, we don’t have a breakdown yet, but if we do, all bets are off.

To counter that, we can see below that money is rotating bullishly into Bitcoin this year, with the coin’s relative performance against the S&P 500 and Nasdaq.

That outperformance switched in April when Bitcoin topped and it’s underperformed sharply since then. But this happens all the time, and time will tell if this is a consolidation ahead of a new up move, or the start of another bear market in the OG alternative currency.

Marathon is struggling

Marathon has seen its share price absolutely destroyed in the past couple of years, but that’s for good reason. The company was basically printing money during the time when Bitcoin hit its all-time highs, but it’s a very long way from that today.

Bitcoin production looks great, and capacity continues to fly. However, volume is only one piece of the puzzle. The second, and arguably more critical piece, is margins.

For example, Q1 saw Bitcoin production soar 74%, but revenue was actually lower year-over-year due to Bitcoin pricing. Below we have trailing-twelve-months gross profit and gross margins to illustrate the criticality of the issue.

Gross margin was 107% in the four quarters ending March 2022, but came in this time at 20%. Margins have fallen off a cliff, and only massively higher Bitcoin prices can save them.

The company needs higher prices to more easily fund operating costs, but it also holds 3.1k unrestricted coins on its balance sheet, good for about $80M at today’s prices. That’s why what happens to the Bitcoin chart we looked at so critical for Marathon; it is literally betting the proverbial farm on higher prices.

Estimates may finally be low enough

During the go-go days of Bitcoin’s all-time highs, estimates for Marathon and similar companies mooned.

We can see today that has been rectified, and then some. Revenue estimates are about 75% lower for most years, which is totally justified. However, it looks like the pain has largely been taken at this point. The key is whether the coin itself sees a big price breakdown from its descending triangle; if that happens there’s probably more downside to these estimates.

Another consideration for Marathon is its nearly constant use of its common shares as a piggy bank.

The share count continues to fly, and this is just bad all around for holders of the stock. There’s literally nothing good here other than the fact that it avoided issuing more debt to fund operations. But when you see the share count jumping by amounts like what you see above, be wary.

Speaking of debt, Marathon is working to reduce its reliance upon leverage, and has been selling Bitcoin selectively to do so.

Net debt of $610M is still massive, so there’s work to do. But management at least understands there’s a problem, so that’s a good start.

So, what then?

If we take all of this and put it together, we get a mixed bag. Marathon’s price chart in a vacuum looks mildly bullish. The problem is the company and stock are wholly dependent upon what Bitcoin does, and right now, I’m really concerned we’re about to see a massive breakdown of the price of Bitcoin. If that happens, the shorts will pile on Marathon and it will almost certainly go a lot lower.

For what it’s worth, the stock is modestly valued today on a price-to-sales basis, so it’s at least reasonably priced.

I would prefer to see it closer to 2X sales, but this will do. Unfortunately, it’s another tick in the box for the “neutral” stance given the uncertainty around Bitcoin’s price action.

The bottom line on Marathon is that I think you should wait. If we get a breakdown of the channel it’s in, go short unless/until it breaks back into the channel. If it breaks out above, go long unless/until it falls back into the channel. There’s simply too much risk with Bitcoin itself to take a position right now, but this one is worth watching for the next big move.