Business: Riot platforms is a bitcoin mining and digital infrastructure company. It operates bitcoin mining operations in central Texas and Kentucky and an electrical switchgear engineering and manufacturing operation in Denver. It operates a Bitcoin-based infrastructure platform. Its segments include Bitcoin mining and engineering. The Bitcoin Mining segment deals with mining bitcoins. The engineering segment designs and manufactures power distribution equipment and custom-designed electrical products.
Stock market value: $3.97 billion ($11.55 per share)
Property: not applicable
Average cost: not applicable
Activist comment: Starboard is a successful activist investor with extensive experience in helping companies focus on operational efficiency and margin improvement. Starboard has conducted a total of 155 activist campaigns over its history and has achieved an average return of 23.27% compared to 15.27% for the Russell 2000 over the same period.
Starboard has taken a position at Riot Platforms and sees opportunities to create operational and strategic value.
Riot Platforms is engaged in both bitcoin mining and owning and operating its own mining facilities. Vertical integration allows Riot to directly control its operations and manage input costs such as energy fees and overheads, rather than renting space from third-party data center operators. Riot has two business segments: Bitcoin Mining and Engineering (design and manufacturing of power distribution equipment and custom electrical products). The company is one of the largest publicly traded bitcoin mining companies, with over 1 gigawatt (GW) of developed installed capacity between its facilities in Rockdale, Texas; Corsicana, Texas; and Kentucky. Riot also holds 16,728 bitcoins.
Despite bitcoins with growth of around 130% this year and an incoming cryptocurrency-friendly presidential administration, Riot's share price fell 24% before Starboard's stance was announced compared to an average year-to-date return of over 100% for competitors. Such significant underperformance in a company with such strong prospects can only reflect an extreme lack of confidence in management – and with good reason. First, selling, general and administrative expenses have spiraled out of control to $225 million last year compared to $67 million in 2022. One reason is the stock-based compensation paid to executives. Despite consistently generating losses and a three-year return of -54.7%, management paid itself 11.5%, 9.5% and 32.12% of its total revenue in stock-based compensation over the past three years. As such, the company has the highest energy plus cash SG&A costs per coin in the market, despite access to relatively cheap energy, as well as the highest stock compensation per coin. As a result, the company has generated negative net operating income in each of the last three years, posting its largest-ever operating loss of $304 million. Add to this a terrible corporate governance record with a five-member board of varying compositions and incidents of nepotism at senior levels of the company. As a result, Riot trades at one of the cheapest multiples in the industry based on enterprise value to earnings before interest, taxes, depreciation and amortization, and EV to PH/s (petahash per second, a measure of computing power).
Starboard has extensive experience in corporate governance and helping boards of directors “professionalize” companies and optimize operations. Just adding a Starboard representative to the board would give the markets great confidence that the board is on track to create shareholder value. Starboard is a unique enabler with expertise in improving operational performance and margins, skills that every management team should be proud to have in an engaged shareholder. The company will undoubtedly advocate for reducing unnecessarily high SG&A costs and ensuring executive compensation is appropriately sized to reflect business performance.
But the good news for management and management is that the second part of Starboard's plan could make them all rich: capitalize on the opportunities associated with massive demand from hyperscalers or large cloud computing companies that operate data centers and provide infrastructure and cloud services. These companies, such as Amazon Web Services, Microsoft Azure and Google Cloud, to name a few of the largest, are in a battle to contract and build sites to support high-performance computing (HPC) and artificial intelligence (AI). data center operations. Cryptocurrency miners share several key features of these applications that make them excellent candidates for contracting their production capacity or transforming crypto operations, namely high-performance computing infrastructure, access to energy (preferably renewable), energy management expertise, and operational scalability , among others others. While the specific needs of hyperscale miners are not identical to those of cryptocurrency miners, it is much faster and cheaper for them to convert existing facilities within a year or two, rather than taking several years to build their own facilities from scratch.
This is a strategy that several of Riot's competitors have employed, much to the delight of their shareholders. Earlier this year, Core Scientific, another bitcoin mining company, struck a deal with CoreWeave, an Nvidia-backed AI data center startup, to supply 500 megawatts capacity to support HPC CoreWeave operations. This arrangement is worth $8.7 billion in cumulative revenues over 12 years for Core Scientific, which is expected to generate approximately $1 million in incremental cash flow per MW contracted under the agreement at a profit margin of 75-80%, significantly higher than anticipated . he would receive from his normal bitcoin mining activities. In response to Core Scientific's initial announcement of a partnership with CoreWeave in June, Core Scientific's stock price surged 40% the next day and has since surged nearly 220%. Despite being the fifth largest mining company by hash rate, it is currently the second largest by market capitalization. Bit Digital, Hive Digital, Hut 8 and Iren have also already transitioned to mixed use with several other miners piloting or exploring the potential to exploit this huge opportunity. Shares of Bitcoin mining companies that have already moved production capacity to HPC have delivered an average year-to-date return of 105.8% compared to an average of -3.4% for peers that have not yet announced such plans (Riot, Mara Holdings and CleanSpark).
The good news for Riot shareholders is that the company is in an excellent position to capitalize on the enormous opportunity presented by leasing compute power to hyperscalers. The bitcoin mine in Rockdale, Texas is the largest in North America and has a developed capacity of 700 MW. Its facility in Corsicana, Texas, currently has a capacity of 400 MW and is expected to have approximately 1 GW of capacity when completed. These plants have features that benefit hyperscalers (energy access, proximity to major metropolitan areas, low latency, and controlled disaster risk). Extrapolating from the Core Scientific deal, Riot has the potential to generate $1 million per MW of cash flow from hyperscaling. The Corsicana facility will soon have 600 MW of unused capacity that can be outsourced to hyperscalers now without impacting any of the company's existing bitcoin mining operations. Assuming Riot only converted the 600 MW it is working to bring online at its Corsica facility, it could generate $600 million in additional cash flow annually (compared to current revenues of $313 million). If Riot was able to convert an additional full 1.1 GW of its projected total capacity at Rockdale and Corsica, that number could almost triple. Additionally, if the company signs an agreement, as Core Scientific did with CoreWeave, the hyperscaler would cover virtually all of the capital expenditures to build or convert those operations. What's more, in JulyRiot took over Block Mining with its facilities in Kentucky and is looking to increase its capacity from 60 MW to 300 MW, which may not be ideal for hyperscalers, but could certainly at least be used for bitcoin.
There are certainly traditional Starboard-type levers in this commitment to creating shareholder value, such as operational improvements, divestitures and non-core investments, as well as better corporate governance. However, the core element of the company's campaign and message to management is simple: look around you. Riot is criticized by its competitors for not taking advantage of the huge opportunity presented by leasing computing power to hyperscale entities. Each announcement of such a contract understandably causes the shares of their competitors to skyrocket. Riot is perfectly positioned to take advantage of this.
Riot has already come forward and stated that it has spoken with Starboard several times, welcomes the company's input and looks forward to continued constructive dialogue to create value for all shareholders. However, at first glance, it would not be unreasonable to believe that Starboard may face difficulties given the company's very low performance on corporate governance metrics, its five-person board with only one seat available at the next meeting, and recent actions that indicate the company is focusing solely on being the largest vertically integrated bitcoin miner. Shareholder activism often comes down to presenting compelling arguments. There is one on the starboard side, at least for 600 MW, which is not yet in use. Once management sees money coming in that will enable them to grow to the above-average compensation they receive, it won't be a long step to convert their other positions into other competencies.
Moreover, Riot recently bought Bitcoins worth $510 million on the open market using the proceeds from a convertible senior note offering, reflecting the fact that he may want to acquire bitcoin today at a price that exceeds his current mining capacity. There would be no better way to achieve this goal than to convert some of its capacity into hyperscalers to generate strong and stable cash flows well in excess of what normal operations would provide. If Riot is really that adamant about owning bitcoin, it could use some of the excess cash flow to buy some of the bitcoin it would otherwise mine. The board must decide whether Riot wants to be a professionally run company that optimizes value for everyone involved, or whether it wants to simply be a bitcoin miner. If the board chooses the latter, it will not only be choosing to give up billions of dollars in value, but will be setting itself on a path to a potentially distracting and costly proxy fight with Starboard over the next two years – at the end of which the board could walk away with nothing. We don't see this happening because there seems to be a lot of room for compromise.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, an investment fund investing in a portfolio of 13D activist investments. Riot Platforms is owned by a fund.