a job: Riot pads It is a Bitcoin mining and digital infrastructure company. It has bitcoin mining operations in central Texas and Kentucky, and electrical switchgear engineering and manufacturing operations in Denver. It operates a Bitcoin-based infrastructure platform. Its sectors include Bitcoin mining and engineering. The Bitcoin Mining business is engaged in the business of Bitcoin mining. The Engineering segment designs and manufactures custom-designed power distribution equipment and electrical products.
Stock market value: $3.97 billion ($11.55 per share)
ownership: unavailable
Average cost: unavailable
Activist's comment: Starboard is a highly successful activist investor with extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has taken a total of 155 previous activist campaigns in its history and generated an average return of 23.27% versus 15.27% for the Russell 2000 over the same period.
Starboard has secured a position at Riot Platforms and sees opportunities to create operational and strategic value.
Riot Platforms is in the business of mining Bitcoin, in addition to owning and operating its own mining facilities. Vertical integration enables Riot to directly control its operations and manage input costs such as energy and overhead fees, rather than leasing space from external data center operators. Riot has two business segments: Bitcoin mining and engineering (design and manufacture of custom-designed power distribution equipment and electrical products). The company is one of the largest publicly traded Bitcoin mining companies with more than 1 gigawatt (GW) of advanced power capacity between its facilities in Rockdale, Texas; Corsicana, Texas; And Kentucky. Riot also owns 16,728 bitcoins.
Although Bitcoin With Riot's stock price up nearly 130% this year and the incoming crypto-favorite presidential administration, Riot's stock price fell 24% before the announcement of Starboard's position versus an average annual return of more than 100% for its peers. Such a significant underperformance in a company with such strong winds can only signify a severe lack of confidence in management – and for good reason. First, spending on selling, general and administrative expenses is out of control by as much as $225 million last year, up from $67 million in 2022. Part of the reason for this is stock-based compensation paid to executives. Despite continuing to make losses and with 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 energy cost plus cash SG&A expense per currency in the industry, despite having access to relatively cheap energy, as well as the highest equity compensation per currency. Accordingly, the company has had negative net operating income in each of the past three years, with its largest operating loss ever this year at $304 million. Add to that a terrible record of corporate governance with a five-person tiered board and instances of nepotism within the upper echelons of the company. As a result, Riot trades at one of the cheapest multiples in the industry based on the ratio of enterprise value to EBITDA and EV to PH/s (petahashes per second, a measure of computational power).
Starboard has extensive experience in corporate governance and helping boards “professionalize” companies and improve operations. Simply adding a Starboard representative to the board would give the markets tremendous confidence that management is on the path to creating shareholder value. Starboard is an exceptional activist with experience in improving operational performance and margins, skills that any management team should be excited to have in an engaged shareholder. The company will undoubtedly be called upon to reduce unnecessarily high SG&A expenses and appropriately size executive compensation to reflect business performance.
But the good news for the board and management is that the second part of Starboard's corporate plan could make them all rich: pursuing the massive demand opportunity from hyperscalers or large-scale 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 a few of the largest, have been in a battle to contract and build sites to run high-performance computing (HPC) and artificial intelligence (AI). Data center operations. Cryptocurrency mining facilities share several key inputs with these applications that make them excellent candidates for contracting out their capabilities or converting their cryptocurrency operations: high-performance computing infrastructure, access to energy (preferably renewable), energy management expertise, and scalability. Operational expansion, among others. While the specific needs of hyperscalers do not match those of cryptocurrency miners, it is faster and cheaper for them to convert existing facilities in a year or two rather than spending several years building their own facilities from the ground up.
This is a strategy that many of Riot's competitors have followed, much to the delight of their shareholders. Earlier this year, Core Scientific, another Bitcoin mining company, entered into an agreement with CoreWeave, an AI data center startup backed by Nvidia, to… Connecting 500 megawatts Ability to host CoreWeave's HPC operations. The arrangement amounts to $8.7 billion in cumulative revenue over 12 years for Core Scientific, which is slated to generate approximately $1 million in incremental cash flow for every 1 MW contracted under the deal at a profit margin of 75% to 80%. It is much more than it used to be. You will receive from regular Bitcoin mining operations. In response to Core Scientific's first announcement of its partnership with CoreWeave in June, Core Scientific's stock price rose 40% the next day and has risen approximately 220% since then. Despite being the fifth largest mining company by hash rate, it is now the second largest by market capitalization. Bit Digital, Hive Digital, Hut 8 and Iren have already made the switch to hybrid use with many other miners experimenting or exploring the possibility of taking advantage of this huge opportunity. Bitcoin mining stocks that have already shifted their energy to high-performance computing (HPC) have generated an average YTD return of 105.8% versus an average of -3.4% for peers that have not yet announced plans to do so (Riot, Mara Holdings, CleanSpark).
The good news for Riot shareholders is that the company is in an excellent position to capitalize on the enormous opportunity that leasing capacity presents to hyperscalers. The Bitcoin mining facility in Rockdale, Texas is the largest in North America with a developed capacity of 700 megawatts. Its facility in Corsicana, Texas, currently has a capacity of 400 megawatts, and when completed is expected to have a capacity of approximately 1 gigawatt. These stations have characteristics suitable for hyperscalers (access to power, proximity to major metro areas, low latency, and controlled natural disaster risk). Extrapolating from the underlying scientific deal, Riot has the opportunity to generate $1 million in cash flow per megawatt at scale. The Corsicana facility will soon have 600 megawatts of unused capacity that can now be contracted out to super-mining companies without impacting any of the company's existing Bitcoin mining operations. Assuming Riot just brought the 600 megawatts it brings online at its Corsicana facility, it could generate an additional $600 million in cash flow per year (versus $313 million in revenue today). If Riot can convert the full additional 1.1 gigawatts of its expected total capacity at Rockdale and Corsicana, that number could nearly triple. Additionally, if the company signs a deal like Core Scientific did with CoreWeave, Hyperscaler would pay for nearly all of the capital expenditures to build or convert those operations. Moreover, in JulyRiot acquired Block Mining With its facility in Kentucky it aims to increase its capacity from 60 MW to 300 MW, which may not be ideal for super-scalers, but can certainly be used at least for Bitcoin.
To be sure, there are traditional “Starboard” type tools in this engagement for shareholder value creation such as operational improvements, divestments of non-core businesses and investments, as well as improved corporate governance. However, the core element of the company's campaign and message to management is simple: Look around. Riot is being criticized by its competitors for failing to capitalize on the massive opportunity provided by leasing hyper-scaling capacity. It is understood that every announcement of such a contract sends the shares of their peers on an upward trajectory. And Riot is in an excellent position to take advantage of this.
Riot has already announced that it has spoken with Starboard on several occasions, welcomes the company's input and looks forward to an ongoing constructive dialogue in order to create value for all stakeholders. However, it would not be unreasonable at first glance to believe that Starboard may face difficulties based on the company's scoring very low on corporate governance metrics, its five-person board with only one seat available at its next meeting, and recent actions that demonstrate that the company's focus Just on being the largest vertically integrated Bitcoin mining company. Shareholder activism often makes an indisputable case. There's one Starboard here, at least for the 600 megawatts that haven't been used yet. Once management saw the money coming in, allowing them to grow into the huge compensation they were receiving, it wouldn't be a long jump to shift their other capabilities.
Moreover, recently purchased riot control $510 million worth of Bitcoin in the open market using the proceeds from a convertible senior bond offering, reflecting that it might want to acquire Bitcoin today at a rate beyond its current mining capacity. There would be no better way to achieve this goal than by shifting some of its hyper-scaleability to generate strong, stable cash flow that far exceeds what its normal operations can do. If Riot was really determined to own Bitcoin, it could use some of that excess cash flow to acquire some Bitcoin that it could have mined. Management must decide whether Riot wants to become a professionally managed company that optimizes value for all participants or whether it just wants to become a Bitcoin mining company. If management decides on the latter, not only will it choose to give up billions of dollars in value, it will set itself on the path to a potentially costly and distracting proxy battle with Starboard over the next two years — at the end of which management could walk away with nothing. We don't see that happening because there seems to be a lot of room for compromise here.
Ken Squire is founder and president of 13D Monitor, an institutional research service on shareholder activism, and founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. Riot Platforms is owned by the Fund.
