2021 has been a stellar year for the Argo Blockchain (LSE:ARB) share price. Since January, this cryptocurrency mining business has watched its stock rise by nearly 200%. While the performance in recent months has been fairly lacklustre, the company continues to post encouraging progress updates. So will I be adding this firm to my growth portfolio? No. Let me explain why.
The rising Argo Blockchain (ARB) share price
Last week, the company released its operational update for August, resulting in a slight bump to the ARB share price. A total of 206 Bitcoin and equivalents were mined compared to the 225 in July. Seeing this drop is not a particularly pleasant sight. However, when factoring in the rising price of Bitcoin, profit margins for the period rose to 86% versus 83%.
Overall, revenue for August came in 22% higher at £6.83m, pushing the total for the year so far to £42.4m. That’s already more than double the £19m achieved in the whole of 2020. So, I’m not surprised to see the ARB share price rise to reflect this performance. And it seems analysts believe the growth will continue, as current forecasts indicate full-year revenue for 2021 of £79m.
Comparing this figure to the current market capitalisation of £535m yields a price-to-sales ratio of just under seven. That’s quite low for a high-growth company, especially for one with massive profit margins. At first glance, this would certainly seem like a cheap investment. But this could change overnight.
Huge risks lie ahead
Argo Blockchain, at its core, is effectively a commodities business. Its value is driven by the price of an asset determined by the market rather than the firm. This means the company has no pricing power over its products and is entirely at the mercy of volatile Bitcoin prices.
Its fixed-cost operational structure has proven to be quite advantageous recently. And is what’s responsible for Argo Blockchain’s exceptionally high-profit margins. However, this also acts as a double-edged sword. If the price of Bitcoin were to fall, margins would automatically be cut with few levers available to mitigate the impact.
Given the volatility of cryptocurrencies in general, it’s very difficult to judge where these speculative assets are heading over both the long and short term. Consequently, while the business looks on track to meet analyst forecasts, it may fail to reach this milestone. That may be why the stock’s valuation seems relatively cheap today.
The bottom line
All things considered, my views on this business remain unchanged. The ARB share price could be set to explode. But it could equally come crashing down if the mood surrounding cryptocurrencies suddenly changes. And with regulators preparing to introduce new restrictions, a mood change could be inevitable.
Personally, I’m not interested in adding this sort of risk to my portfolio. So, I’m staying on the sidelines for this one.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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