Business: Riot Platforms is a Bitcoin mining and digital infrastructure company. The company has Bitcoin mining operations in Central Texas and Kentucky and electrical equipment engineering and manufacturing in Denver. It operates a Bitcoin-based infrastructure platform. Its segments include Bitcoin mining and engineering. The Bitcoin Mining segment is engaged in Bitcoin mining. The Engineering segment designs and manufactures power distribution equipment and customized electrical products.
Market value: $3.97 billion ($11.55 per share)
Property: n/a
Average cost: n/a
Comment from activists: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has run a total of 155 activist campaigns in its history, delivering an average return of 23.27% versus 15.27% for the Russell 2000 over the same period.
Starboard has acquired 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 electricity and overhead, rather than renting space from third-party data center operators. Riot has two business segments: Bitcoin Mining and Engineering (design and manufacture of power distribution equipment and custom electrical products). The Company is one of the largest publicly traded Bitcoin miners with over 1 gigawatt (GW) of power capacity developed between its facilities in Rockdale, Texas; Corsican, Texas; and Kentucky. Riot also owns 16,728 Bitcoins.
Despite Bitcoin With Riot's stock price up about 130% this year and the new presidential administration being positive about cryptocurrencies, it was down 24% before Starboard's position was announced, compared to an average year-to-date return of over 100% for its peers. This significant underperformance in a company with such strong tailwinds can only mean an extreme lack of trust in management – and for good reason. First, selling, general and administrative expenses are out of control, reaching $225 million last year, up from $67 million in 2022. One reason for this is the stock-based compensation paid to executives . Despite consistent losses and a three-year return of -54.7%, management has paid itself 11.5%, 9.5% and 32.12% of total revenue in stock-based compensation over the past three years. Accordingly, the company has the highest cash electricity plus SG&A costs per coin, despite having access to relatively cheap electricity, as well as the highest stock compensation per coin. Accordingly, the company has posted negative net operating income in each of the last three years, with its largest operating loss ever being $304 million this year. Added to this is a terrible track record of corporate governance, with a five-member board of directors and incidents of nepotism at the higher levels of the company. As a result, Riot trades at one of the most favorable multiples in the industry based on the ratio of 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 management and supports boards of directors in “professionalizing” companies and optimizing processes. Simply adding a Starboard representative to the board would give markets tremendous confidence that management is on track to create shareholder value. Starboard is an exceptional activist with expertise in improving operating performance and margins, skills any management team should look for in an engaged shareholder. The company will undoubtedly work to ensure that the company reduces its unnecessarily high SG&A costs and appropriately aligns executive compensation with business performance.
But the good news for the board and management is that Starboard's second part of the company's plan can make them all rich: take advantage of the huge demand opportunity from hyperscalers, or large cloud computing companies that operate data centers and provide cloud infrastructure and services . These companies, such as Amazon Web Services, Microsoft Azure and Google Cloud, to name just a few of the largest, are struggling to award contracts and build sites to power their high-performance computing (HPC) and artificial intelligence (AI). Data center operations. Crypto mining facilities share with these applications several key inputs that make them excellent candidates for outsourcing their capabilities or transforming their crypto operations, namely high-performance computing infrastructure, access to energy (preferably renewable), energy management know-how and operational scalability others. Although the specific needs of hyperscalers are not the same as those of crypto miners, it is much faster and more cost-effective for them to convert existing assets in a year or two, rather than taking several years to build their own assets from scratch.
This is a strategy that several of Riot's competitors have pursued, much to the delight of their shareholders. Earlier this year, Core Scientific, another Bitcoin miner, entered into an agreement with CoreWeave, an Nvidia-backed AI data center startup, to provide 500 megawatts of capacity for CoreWeave's HPC operations. This agreement is worth $8.7 billion in cumulative sales to Core Scientific over 12 years, generating approximately $1 million in additional cash flow per 1 MW under the agreement at a profit margin of 75 to 80 % is expected to generate far more than expected would be received from its normal Bitcoin mining operations. In response to Core Scientific's initial announcement of its partnership with CoreWeave in June, Core Scientific's stock price shot up 40% the following day and has since risen nearly 220%. Although it is the fifth largest miner in terms of hash rate, it is now the second largest in terms of market capitalization. Bit Digital, Hive Digital, Hut 8 and Iren have also already made the move to mixed use with several other miners running pilots or exploring the potential to capitalize on this massive opportunity. Shares of Bitcoin mining companies that have already shifted capacity to HPC have returned an average of 105.8% year-to-date, compared to an average of -3.4% for peers that have not yet announced plans to do so (Riot, Mara Holdings and CleanSpark).
The good news for Riot shareholders is that the company is uniquely positioned to capitalize on the enormous opportunities presented by leasing capacity to hyperscalers. The Bitcoin mining facility in Rockdale, Texas is the largest in North America with a developed capacity of 700 MW. The Corsicana, Texas facility currently has a capacity of 400 MW and is expected to have approximately 1 GW upon completion. These assets have characteristics favorable to hyperscalers (access to energy, proximity to major metropolitan areas, low latency, and controlled risk of natural disasters). Based on the Core Scientific deal, Riot has the opportunity to generate $1 million per MW of cash flow through hyperscaling. The Corsicana facility will soon have 600 MW of unused capacity, which can now be allocated to hyperscalers without impacting the company's current Bitcoin mining activities. Assuming Riot converts just the 600 MW it plans to bring online at its Corsicana facility, the company could generate $600 million in additional cash flow per year (versus $313 million in revenue today). If Riot were able to convert the additional 1.1 GW of its planned total capacity into Rockdale and Corsicana, that number could almost triple. Additionally, if the company strikes a deal, as Core Scientific did with CoreWeave, the hyperscaler will pay virtually all of the capital costs of building or converting those operations. Additionally, Riot acquired Block Mining with its facilities in Kentucky in July and is aiming to increase capacity from 60 MW to 300 MW, which may not be ideal for hyperscalers but could certainly be used for Bitcoin.
There are certainly traditional Starboard-type levers in this commitment to creating shareholder value, such as operational improvements, non-core divestitures and investments, and improved corporate governance. But the core element of the company's campaign and message to management is simple: look around. Riot is being overtaken by its competitors because it is not taking advantage of the enormous opportunities that arise from leasing capacity to hyperscalers. Any announcement of such a deal understandably sends their competitors' stocks higher. And Riot is in a great position to capitalize on it.
Riot has already commented and stated that it has spoken to Starboard on several occasions, welcomes the company's contributions and looks forward to further constructive dialogue to create value for all shareholders. However, at first glance, it wouldn't be unreasonable to assume that Starboard could run into trouble, given that the company performs very poorly on corporate governance metrics, its five-member board is staggered, and only one seat is available at the next meeting is and recent actions prove that the company is solely focused on being the largest vertically integrated Bitcoin miner. Shareholder activism is often about making an irrefutable argument. Starboard has one here, at least for the 600 MW that is not yet being used. Once management sees money coming in that will allow them to grow into the inflated compensation they've been receiving, it's not a big step to converting their other capabilities.
Additionally, Riot recently purchased $510 million worth of Bitcoin on the open market using proceeds from a convertible note offering. There would be no better way to achieve this goal than to convert part of its capacity into hyperscalers to generate strong and stable cash flow well in excess of what normal operations would achieve. If Riot really is so adamant about owning Bitcoins, it could use some of that excess cash flow to acquire some of the Bitcoins it would have otherwise mined. Management must decide whether Riot wants to be a professionally run company that optimizes value for everyone involved, or whether it wants to just be a Bitcoin miner. If management chooses the latter, it not only forgoes billions of dollars in value, but it also sets itself down the path of a potentially distracting and expensive proxy dispute with Starboard over the next two years – at the end of which management could walk away with nothing . We don't think this will happen as there seems to be a lot of room for compromise here.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments. Riot Platforms is a shareholder in the fund.