In September, Riot Platforms(NASDAQ: RIOT) stock fell to nearly $6 a share, falling to its lowest price in nearly two years. In the three short months since then, Riot Platforms stock has more than doubled. And some investors believe it's just getting started.
Investors believe that Riot Platforms stock could be in for more gains because of what has happened MicroStrategy(NASDAQ: MSTR) stock in recent years. For context, MicroStrategy stock went public in 1998 and had gone nowhere by the end of 2019. But MicroStrategy stock is suddenly up more than 2,500%, just since the beginning of 2020.
The difference for MicroStrategy stock has been its policy regarding digital currency Bitcoin(CRYPTO: BTC). Over the past few years, the company has run into big trouble to get as much cash as possible. And as of December 16, he had managed to spend over $27 billion on buying Bitcoin.
MicroStrategy executive chairman and co-founder Michael Saylor has clearly overseen a large portion of its policy changes regarding Bitcoin. And that's why investors have been paying attention to the praise he heaps on Riot Platforms.
Saylor continues to use his social media presence to point out that Riot Platforms is “on the Bitcoin standard.” Now, he points to the recent change to the company's approach to Bitcoin.
Riot Platforms in s Bitcoin mining companywhich means it regularly accepts Bitcoin only for doing business. At the end of November, the company had 11,425 Bitcoins, all of which it had mined. But managers want more than this. And he doesn't stick around to get them through mining.
On December 9, Riot Platforms decided to raise funds by issuing convertible notes. But rather than using the money for business purposes, management said they plan to use it primarily to buy Bitcoin.
Riot Platforms ended up netting $579 million from the debt offering, which is huge given its roughly $4 billion market capitalization at the time. And managers have already been busy buying Bitcoin with his new fortune. As of December 13, he had 17,429 Bitcoins, worth about $1.8 billion as of this writing.
In short, Riot Platforms added 6,000 Bitcoins in just two weeks.
Debt is one of the tools MicroStrategy has used to increase its own Bitcoin holdings. As of Sept. 30, the company had nearly $4.3 billion in principal total of its convertible notes issued, while it was a debt-free company just a few years ago.
To put it simply, MicroStrategy has used debt (and stock offerings) to buy Bitcoin. But the price of Bitcoin is near an all-time high and has increased over 150% in the past year alone. This has boosted MicroStrategy's valuation, making it easier to get additional money.
The idea is that Riot Platforms can run a very similar playbook. He plans to keep mining Bitcoin, yes. But he also plans to continue to find ways to raise more cash and buy Bitcoin on the open market. If the price of Bitcoin continues to rise, it could be a worthwhile venture for shareholders.
Generally speaking, I'm not a fan of businesses loading up on debt because it adds another layer of risk to the investment. I think investors need to recognize this risk and others when thinking about buying Riot stock, or any stock for that matter.
However, to look at things more optimistically, Riot says it has a 37% year-to-date Bitcoin yield. This is a term used by several companies, including MicroStrategy, which basically means the percentage increase for Bitcoin payouts per diluted share. For investors hoping to see Riot run the MicroStrategy playbook, this 37% yield is pretty exciting.
For perspective, MicroStrategy has a great Bitcoin yield of 72% year to date. But this is not an apples-to-apples comparison with Riot because MicroStrategy was working on this strategy all year while Riot was just starting out. Looking at more recent moves, Saylor says MicroStrategy's Bitcoin yield was only 3% in the first week of December.
Without getting too deep into the weeds, it appears that given current valuations, Riot may be in a better position to achieve a higher Bitcoin yield compared to MicroStrategy, at least for now.
As long as the price of Bitcoin holds steady or continues to rise, that could make Riot Platforms the best stock to buy today. But to reiterate, both companies are running a risky strategy that depends on several factors outside of their control, including stability in the crypto space, stock market conditions, and institutional desire to finance the debt .
In conclusion, Riot stock could be a winner with its current strategy but investors need to avoid overconfidence about the future here. And you don't have to choose MicroStrategy or Riot – you can always skip the debt risk by investing in Bitcoin directly instead.
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Jon Quast does not have a position in any of the stocks mentioned. The Motley Fool has posts in and recommends Bitcoin. The Motley Fool has a disclosure policy.
