Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Business: Riot Platforms is a bitcoin mining and digital infrastructure company. It is involved in bitcoin mining in central Texas and Kentucky, and electrical switchgear engineering and manufacturing in Denver. It operates a Bitcoin-driven infrastructure platform. Its segments include Bitcoin Mining and Engineering. The Bitcoin Mining segment deals with the mining of Bitcoins. The engineering segment designs and manufactures power distribution equipment and custom electrical products.
Stock market value: $3.97 billion ($11.55 per share)
Ownership: n/a
Average cost: n/a
The activist’s comment: Starboard is a highly successful activist investor and has a strong track record of helping companies focus on operating efficiencies and improving margins. Starboard has had a total of 155 previous active companies in its history and has an average return of 23.27% versus 15.27% for the Russell 2000 over the same period.
Starboard has taken a position at Riot Platforms and sees opportunities to create operational and strategic value.
Riot Platforms both mines Bitcoin and owns and operates its own mining facilities. Vertical integration allows Riot to directly control its operations and manage input costs such as electricity and overhead costs, as opposed to 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 more than 1 gigawatt (GW) of developed electricity between its facilities in Rockdale, Texas; Corsicana, Texas; and Kentucky. Riot also owns 16,728 Bitcoins.
Despite bitcoin Riot’s stock is up about 130% this year and the new cryptocurrency-friendly presidential administration is down 24% before announcing Starboard’s position, compared to an average year-to-date return of more than 100% for peers. Such significant underperformance at a company with such strong tailwinds can only mean an extreme lack of confidence in management — and for good reason. First, selling, general and administrative expenses were out of control at $225 million last year, compared to $67 million in 2022. Part of the reason for this is the stock-based compensation paid to executives. Despiteconstant losses and three-year returns of -54.7%, management has paid themselves 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 cost of electricity plus cash SG&A expenses per coin in the space, despite access to relatively cheap energy, as well as the highest stock compensation per coin. Accordingly, the company has posted negative net operating income in each of the past three years, with its biggest operating loss this year at $304 million. Add to that a terrible corporate governance record with a five-member board and instances of nepotism at the company’s highest levels. As a result, Riot trades at one of the cheapest multiples in the industry based on the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization and EV to PH/s (petahashes per second, a measure of computing power).
Starboard has extensive experience in corporate governance and assisting boards of directors in “professionalizing” companies and streamlining operations. Simply adding a Starboard representative to the board would give the markets tremendous confidence that management is on track to create shareholder value. Starboard is an exceptional activist with a track record of improving operational performance and margins, skills that any management team should admire from an engaged shareholder. The firm will no doubt advocate for the company to reduce excessively high SG&A costs and to 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 plan could make them all richer: to pursue the possibility of mass demand from hyperscalar, or large-scale cloud computing companies that run 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 biggest, have been vying for contracts and building sites to run their high-performance computing (HPC) and artificial intelligence (AI) capabilities. data center operations. Cryptominers have several key inputs with these programs that make them great candidates to transfer their power or transform their crypto operations, namely high-performance computing infrastructure, access to energy (predominantly renewable), energy management expertise, and operational scalability. among others. Although the specific needs of hyperscalers are not identical to those of cryptominers, it is much faster and cheaper for them to convert existing facilities in a year or two, rather than taking several years to build their own facilities from scratch.
It’s a strategy that several of Riot’s competitors have followed, much to the delight of their shareholders. Earlier this year, Core Scientific, another Bitcoin miner, struck a deal with CoreWeave, an AI data center startup backed by Nvidia, to to supply 500 megawatts capacity to host HPC CoreWeave operations. The arrangement will provide Core Scientific with aggregate revenue of $8.7 billion over 12 years, which should generate approximately $1 million in additional cash flow per 1 MW contracted, at a profit margin of 75% to 80%, significantly more than it will currently receive from its normal bitcoin mining operations. In response to Core Scientific’s first announcement of its collaboration with CoreWeave in June, Core Scientific’s stock price soared 40% the next day and has since gained 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 moved to mixed use with several other miners piloting or exploring the potential to capitalize on this huge opportunity. Bitcoin mining stocks that have already shifted capacity to HPC have delivered an average year-to-date return of 105.8%, compared to an average of -3.4% for peers that have yet to announce plans to do so (Riot, Mara Holdings and CleanSpark).
The good news for Riot shareholders is that the company is in a great position to capitalize on the huge opportunity presented by power leasing to hyperscalers. The Bitcoin mining facility in Rockdale, Texas is the largest in North America with a capacity of 700 MW. Its facility in Corsicana, Texas, currently has a capacity of 400 MW and is expected to have about 1 GW upon completion. These plants have characteristics favorable to hyperscalers (access to energy, proximity to major metro areas, low latency, and controlled natural disaster risk). Extrapolating from the Core Scientific deal, Riot has the potential to generate $1 million in cash flow per MW through hyperscaling. The Corsicana facility will soon have 600MW of unused capacity that can now be contracted out to hyperscalers without affecting any of the company’s current bitcoin mining operations. Assuming Riot converts just the 600 MW it’s working on at its Corsicana facility, it could generate $600 million in additional cash flow annually (vs. $313 million in revenue today). If Riot could convert an additional full 1.1GW of its projected total capacity at Rockdale and Corsicana, that number could nearly triple. Also, if a company signs a deal like Core Scientific did with CoreWeave, the hyperscaler will pay for virtually all of the capital costs to build or transform those operations. Moreover, in JulyRiot acquired Block Mining with its capacity in Kentucky and is looking to increase its capacity from 60MW to 300MW, which may not be ideal for hyperscalers, but can certainly be used at least for Bitcoin.
To be sure, this engagement has the traditional Starboard-type levers for creating shareholder value, such as improving operations, divesting non-core businesses and investments, and improving corporate governance. However, the core element of the company’s campaign and message to management is simple: look around you. Competitors berate Riot for failing to take advantage of the huge opportunities that come with leasing capacity to hyperscalers. Of course, each announcement of such a contract causes the shares of analogues to rise rapidly. And Riot is in a great position to capitalize on that.
Riot has already spoken out and said it has spoken with Starboard on several occasions, welcomes the firm’s input and looks forward to continued constructive dialogue to create value for all shareholders. However, on the face of it, it would be counterintuitive to think that Starboard could be in trouble based on the fact that the company has very poor corporate governance records, its five-person board is staggered and only one seat at the next meeting, and recent actions that suggest the company is focused solely on being the largest vertically integrated bitcoin miner. The activism of shareholders is often reduced to making irrefutable arguments. Starboard has one here, at least for the 600MW not yet in use. Once management sees the money coming in, allowing them to grow to the outsized compensation they’ve been getting, it’s not so quick to convert their other strengths.
Moreover, Riot recently bought $510 million in bitcoins in the open market, using the proceeds from the convertible senior bond offering, indicating that it may want to buy bitcoins today at a rate that exceeds its current mining potential. There could be no better way to achieve this goal than to convert some of its capacity into hyperscalar to generate strong and stable cash flow that far exceeds normal operations. If Riot is really that adamant about owning bitcoins, it could use some of that excess cash flow to purchase some of the bitcoins it would otherwise mine. Management needs to decide if Riot wants to be a professionally managed company that optimizes value for all involved, or if it just wants to be a bitcoin miner. If management chooses the latter, it will be deciding not only to give up billions of dollars in value, but also setting itself on the path to a potentially distracting and expensive 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 as there seems to be a lot of room for compromise here.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the 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 a foundation.
