On Monday, Help.com (NASDAQ:SPRT) inventory rocketed 250% after announcing a merger with Greenidge Era Holding, an built-in Bitcoin mining agency. The strikes would possibly remind skeptics of the 2018 Bitcoin mania when a beverage maker tripled its stock overnight by renaming themselves “Lengthy Island Blockchain.” SPRT inventory, a buyer assist agency with no important crypto expertise, appears to be like harking back to such market euphoria.
However look deeper and Help.com has all the explanations – each terrifying and logical – to hit $15.
With competing Bitcoin mining corporations buying and selling at far larger multiples, the California-based agency appears to be like downright low-cost compared. And as soon as the pendulum swings the opposite means on this notoriously cyclical enterprise, don’t be shocked when SPRT inventory finds itself buying and selling down with its newfound friends.
A Merger of Unequals
At first look, the merger appears to be like horrible for Help.com. Current shareholders will lose management of their 24-year-old customer support agency and discover themselves thrown into a very unrelated enterprise. All for an 8% possession sliver of a Bitcoin mining firm with a 106 MW fuel energy plant hooked up.
A deeper dive, nonetheless, exhibits some logic to the insanity. In accordance with the merger press launch, Help.com pays money and shares for an 8% possession within the mixed agency. The money portion values Greenidge at $1.1 billion, a major low cost to Riot Blockchain (NASDAQ:RIOT) and Marathon Digital Holdings (NASDAQ:MARA). The inventory, in the meantime, pegs Greenidge even cheaper at $860 million.
And the low cost issues.
By valuing Greenidge at a major low cost to friends, Help.com primarily assured upside for its shareholders. So, though it’s solely receiving 8% of a Bitcoin mining operation, in the present day’s crypto market is so sizzling that the inventory shot up anyway.
What’s SPRT Inventory Value?
Valuing SPRT at $15 requires an unshakable perception that the markets pretty worth the opposite Bitcoin miners. It’s a significant stretch for any conventional investor, however doing that gives the groundwork for constructing a variation of the merger-arbitrage hedge fund strategy.
At this time, Riot and Marathon each commerce near a $3.75 billion enterprise worth. Every has round 1.0 exahash/second (EH/s) mining capability – roughly the identical as Greenidge’s 1.1 EH/s. Finicky traders also can throw in Greenidge’s $50 million power plant to the agency’s worth, but it surely’s a rounding error within the grand scheme of crypto mining.
When you think about money and SPRT’s untouched market cap, that makes SPRT’s 8% possession stake value nearly $300 million, or $15/share. For an organization that traded at simply $2 final Friday, that’s an outstanding one-day return.
Pitfalls to Simplistic Investing
There are, nonetheless, many caveats to the tantalizing 100% upside from right here.
Accounting. The obvious subject is that traders don’t know whether or not Greenidge has a pristine stability sheet or is drowning in debt. Greenidge’ mum or dad may additionally offload debt to the entity.
Merger likelihood. Although SPRT has already lined up 30% of its shareholders to vote “sure” to a merger, both facet may nonetheless make merger talks collapse.
Pricing stability. Bitcoin mining is a notoriously cyclical enterprise, and investor sentiment has priced these corporations as if good occasions won’t ever finish.
The ultimate level deserves particular point out. Bitcoin mining is a commoditized enterprise that depends on low-cost energy, entry to mining gear and rising cryptocurrency costs. That’s as a result of miners are an operationally leveraged play on the underlying materials they mine; excessive costs imply excessive earnings.
However identical to their real-world counterparts in metals and mining, these digital corporations are additionally vulnerable to boom-and-bust cycles. In 2018, Bitcoin’s fall brought about crypto mining corporations to lose 95% or extra of their market worth in lower than a 12 months. And if Bitcoin costs fall once more, many of those miners will notice they’ve badly overpaid for the most recent mining package.
Few present this higher than Marathon Patent Group. The agency now plans to have 10.36 EH/s capability by the tip of the 12 months as soon as they set up 70,000 more miners. And as an alternative of hedging their bets by promoting Bitcoin futures (as most agricultural and mining corporations do), Marathon has doubled down through buying Bitcoin instead.
Dangers of Scorching Investing
SPRT inventory could proceed rising within the quick time period. The corporate’s $130 million market cap nonetheless woefully underestimates the 1.1 EH/s agency it would ultimately turn out to be. However there are additionally different methods to play the inventory.
These seeking to play “hedge fund for a day” would possibly strive their hand at a a modified merger arbitrage technique – shopping for (or shorting) Help.com in expectation that the merger will (or won’t) undergo. Riot and Marathon present affordable counterbalancing trades. Others who’re in it for Bitcoin’s rise would possibly think about Bitcoin name choices as properly. These “weapons of mass destruction” present a good cleaner means for the actually adventurous to wager on crypto’s rise.
Simply don’t purchase SPRT after which ignore the inventory utterly. As a result of regardless of how a lot you like cryptocurrency, the cruel financial realities of Bitcoin mining will ultimately catch as much as the most popular gamers who forgot to diversify their enterprise. And we gained’t know what path Greenidge will take.
On the date of publication, Tom Yeung didn’t have (both immediately or not directly) any positions within the securities talked about on this article.
Tom Yeung, CFA, is a registered funding advisor on a mission to convey simplicity to the world of investing.