Riot Platforms is positioning itself as a key player in the bitcoin mining and digital infrastructure realm, with its operations anchored in central Texas and Kentucky for mining, and Denver for electrical switchgear engineering and fabrication. Their business model focuses on operating a bitcoin-driven infrastructure platform, segmented into two main areas: Bitcoin Mining and Engineering. The mining segment hones in on extracting bitcoin, while the engineering segment is involved in designing and manufacturing power distribution equipment and custom-engineered electrical products.
Currently, Riot Platforms stands with a stock market valuation of approximately $3.97 billion, trading at $11.55 per share. Although ownership and average cost data are unavailable, Riot’s current strategic shifts are drawing significant attention. Notably, activist investor Starboard has recently acquired a position in Riot and is keen on unlocking operational and strategic value.
Riot’s approach of vertical integration allows it to directly oversee operations and manage key inputs like power costs and overheads, steering clear of third-party data center rental agreements. With over 1 gigawatt of power capacity spread across its locations in Texas and Kentucky, Riot is also a major bitcoin holder with 16,728 bitcoins.
Despite the promising rise of bitcoin this year by about 130% and supportive political winds for cryptocurrency, Riot’s stock has seen a 24% dip before Starboard’s involvement, contrasting starkly with its peers’ more than 100% growth. This downturn suggests a lack of confidence in the management, likely due to increased expenses and stock-based compensation, which significantly ate into the revenue over the past three years. Riot’s overhead costs and stock compensations in relation to bitcoin mining costs are the highest in the industry. Furthermore, they’ve reported negative net operational income for three consecutive years, with a record $304 million operating loss this year alone. Governance issues, such as nepotism and a staggered board, further color the situation, placing Riot at a low valuation compared to industry metrics.
Starboard, with its profound expertise in corporate governance and operational optimization, aims to bring about a transformative change. Getting a Starboard representative onto Riot’s board could significantly bolster market confidence in Riot’s management pursuing shareholder value enhancement. Streamlining SG&A expenses and aligning executive pay with company performance are pivotal changes expected.
Starboard’s plan doesn’t just stop at cost-cutting but also proposes a lucrative strategy that could benefit both management and shareholders: tapping into the demand from hyperscalers (large-scale cloud computing firms). These companies, including giants like Amazon Web Services, Microsoft Azure, and Google Cloud, are vying to partner with facilities that have high-performance computing power for AI and data center operations. The potential for Riot to convert its sizable bitcoin mining infrastructure—or to partner with hyperscalers—holds tremendous financial promise, accompanying high profit margins far superior to traditional bitcoin mining. Riot’s significant capacity, such as its 700 MW facility in Rockdale, Texas, is well-positioned to meet such high-tech demands, capturing cash flow gains of about $1 million per MW.
This strategy follows in the footsteps of competitors like Core Scientific, which secured an expansive deal with CoreWeave valued at $8.7 billion over 12 years, reflecting the benefits of mixed infrastructure use. Stocks of firms adopting this model surged by an average of 105.8%, whereas those without revamped plans, including Riot, remained flat or declined. Riot’s untapped capacity at facilities like Corsicana provides an immediate opportunity to contract out 600 MW without disturbing current operations—a potential $600 million annual revenue stream that could see it tripled if more of their capacity is shifted.
While traditional enhancements like governance reforms and divesting non-core operations remain on the table, Riot’s hesitancy in stepping into hyperscaler agreements has left it trailing behind more agile competitors. Recognizing the thriving prospects in this space could propel Riot forward, making valuable contributions not just to their bottom line but also establishing Riot as an innovative leader in mining and infrastructure.
Open to Starboard’s input, Riot is gearing up for constructive dialogue, hoping to balance its current operations with the lucrative hyperscaling path. However, navigating corporate governance limitations and a narrow board seat availability might pose obstacles. Nonetheless, Starboard’s compelling case for capacity conversion indicates viable paths to substantial gain, quelling potential conflicts and leading Riot management to a probable win-win outcome.
Furthermore, Riot recently acquired $510 million worth of bitcoin, which is financed by a convertible notes offering, potentially showcasing a desire to bolster bitcoin reserves beyond mining capacity. This suggests a strategic pivot could bring about new and efficient revenue streams through hyperscaler partnerships, generating greater financial stability. Should Riot’s management decide to embrace professional optimization for collective benefit, they could avert potential conflicts and unlock unparalleled value growth, appeasing both board members and shareholders alike.
Ken Squire, the founder and president of 13D Monitor, provides insights into this investment narrative, with Riot Platforms also included in his 13D Activist Fund portfolio.
