In September, Riot platforms(NASDAQ:RIOT) Shares fell to almost $6 per share, falling to the lowest price in almost two years. In the three short months since, Riot Platforms shares have more than doubled. And some investors believe this is just beginning.
Investors believe that Riot Platforms stock could post more gains because of what happened MicroStrategy(NASDAQ:MSTR) stock from recent years. For context, MicroStrategy stock went public in 1998 and had not gone anywhere at the end of 2019. But MicroStrategy stock is suddenly up more than 2,500% just since the start of 2020.
The difference for MicroStrategy stock is its policies regarding cryptocurrency Bitcoin(CRYPTO: BTC). In recent years, the company has gone to great lengths to get its hands on as much cash as possible. And by December 16, it had managed to spend more than $27 billion purchasing Bitcoin.
Michael Saylor, executive chairman and co-founder of MicroStrategy, has clearly overseen much of his policy changes regarding Bitcoin. And that’s why investors have been paying attention to the praise he’s showering on Riot Platforms.
Saylor continues to use his social media presence to point out that Riot Platforms is “to the Bitcoin standard.” Highlighting the recent change in the company’s approach to Bitcoin.
Riot Platforms is a Bitcoin mining company, meaning it regularly receives Bitcoin just for doing business. By the end of November, the company had 11,425 Bitcoins, and it had mined them all. But management wants more than that. And there’s no waiting to guide them through the mining industry.
On December 9, Riot Platforms decided to raise money by issuing convertible bonds. But instead of using the money for business purposes, management said it planned to use it primarily to buy Bitcoin.
Riot Platforms ultimately raised $579 million from the debt issuance, which is huge considering its market cap was around $4 billion at the time. And management is already busy buying Bitcoin with its new fortune. As of December 13, it had 17,429 Bitcoins, which is worth approximately $1.8 billion at the time of 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 September 30, the company had nearly $4.3 billion in aggregate principal amount of convertible notes issued, while just a few years ago it was a debt-free company.
Simply put, MicroStrategy used debt (and equity offerings) to buy Bitcoin. But Bitcoin’s price is near an all-time high and has risen more than 150% in the past year. This has boosted MicroStrategy’s valuation, making it easier to raise additional funding.
The idea is that Riot Platforms can run a very similar playbook. It plans to continue mining Bitcoin, yes. But it also plans to continue finding ways to raise more money and buy Bitcoin on the open market. If Bitcoin’s price continues to rise, this could be a rewarding venture for shareholders.
In general, I’m not a fan of companies that accumulate debt as it adds an extra layer of risk to the investment. I think investors should recognize this and other risks when considering buying Riot stock, or any stock for that matter.
However, to look at things more optimistically, Riot says it has achieved a Bitcoin return of 37% this year. This is a term used by several companies, including MicroStrategy, that essentially means the percentage increase in Bitcoin ownership per diluted share. For investors hoping Riot will execute the MicroStrategy playbook, this 37% return is quite exciting.
For perspective, MicroStrategy has a stellar Bitcoin return of 72% this year. But this isn’t an apples-to-apples comparison with Riot, because MicroStrategy was working on this strategy all year while Riot was just getting started. Looking at more recent developments, Saylor says that MicroStrategy’s Bitcoin return was just 3% in the first week of December.
Without getting too deep into the weeds, it appears that given current valuations, Riot is in a better position to earn higher Bitcoin returns compared to MicroStrategy, at least for now.
As long as Bitcoin’s price remains stable or continues to rise, that could make Riot Platforms stock the better stock to buy today. But again, both companies are pursuing a risky strategy that depends on several factors beyond their control, including stability in the crypto space, stock market conditions, and institutional willingness to fund the debt.
Finally, Riot stock could be a winner with its current strategy, but investors should 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 directly in Bitcoin instead.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Bitcoin. The Motley Fool has a disclosure policy.
Missed MicroStrategy shares? Chairman Michael Saylor is touting this little-known stock that has doubled in value in the past three months. was originally published by The Motley Fool
