Value-focused investors continuously seek stocks priced below their intrinsic value. Riot Platforms Inc (RIOT, Financial), currently priced at $10.95, having recorded a 3.78% loss in a day and a 3-month increase of 3.46%, merits attention. The GF Value indicates a fair valuation of $18.03 for the stock. However, a more in-depth analysis reveals risk factors that could make Riot Platforms a potential value trap.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Identifying the Risks
Despite its seemingly attractive valuation, certain risk factors associated with Riot Platforms should not be ignored. These risks are primarily reflected through its low Beneish M-Score of -1.42 that exceeds -1.78, the threshold for potential earnings manipulation. These indicators suggest that Riot Platforms, despite its apparent undervaluation, might be a potential value trap.
Riot Platforms Inc is a vertically integrated Bitcoin mining company focused on building, supporting, and operating blockchain technologies. The company's segments include Bitcoin Mining; Data Center Hosting and Engineering. It generates maximum revenue from the Bitcoin Mining segment.
Financial Analysis: Unpacking the Beneish M-Score
Developed by Professor Messod Beneish, the Beneish M-Score is based on eight financial variables that reflect different aspects of a company's financial performance and position. Let's delve into some of these variables to understand the financial health of Riot Platforms.
The days sales outstanding (DSO) is an important financial metric that denotes the average time a company takes to collect payment after a sale is completed. Looking at the historical data from the past three years (2021: 0.20; 2022: 0.24; 2023: 0.19), there appears to be a rising trend in Riot Platforms's DSO. A rising DSO figure warrants scrutiny as it can signal financial distress or questionable accounting practices within the company.
The Gross Margin index tracks the evolution of a company's gross profit as a proportion of its revenue. By examining the past three years of Riot Platforms's historical data (2021: 63.25; 2022: 49.59; 2023: 11.55), we find that its Gross Margin has contracted by 7.43%. Such a contraction in the gross margin can negatively impact the company's profitability.
The asset quality ratio, calculated as Total Long-term Assets minus Property, Plant, and Equipment, divided by Total Assets, gauges the proportion of intangible or less tangible assets within a company's asset structure. Analyzing Riot Platforms's asset quality ratio over the past three years (2021: 0.52; 2022: 0.11; 2023: 0.12), an increase might signal underlying issues, such as capitalizing normal operating expenses or goodwill impairment.
The Year-Over-Year (YoY) change in Revenue calculates the percentage difference in sales between the previous year and the current year. Delving into Riot Platforms's revenue data over the past three years (2021: 65.30; 2022: 308.43; 2023: 256.41), it's apparent that there has been a significant surge in revenue in the last 12 months, with a rise of 372.33 %.
The change in Depreciation, Depletion, and Amortization (DDA) reflects the rate at which a company's assets lose value over time. Analyzing Riot Platforms's DDA data over the past three years (2021: 11.36; 2022: 52.77; 2023: 210.83), a decreasing rate might be a cause for concern.
Conclusion: A Potential Value Trap?
Despite its seemingly attractive valuation, the financial analysis reveals several risk factors that could make Riot Platforms a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making investment decisions.
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