Why is the Argo Blockchain share price falling as cryptocurrency moves higher?

It’s been a rather busy couple of months in the world of cryptocurrency. This week saw the IPO of the largest crypto exchange, Coinbase. It was received very well by investors, with shares rallying 52% on the first day. Bitcoin has also continued to move higher, beyond the $60,000 mark. So when I look at the Argo Blockchain (LSE:ARB) share price, I’m a bit surprised. Over the past month, the share price is actually down around 30%, and is trading around 170p. So what’s going on here?

Short dip following a long rally

Argo Blockchain is a specialist cryptocurrency data company. Through computer algorithms and software, it mines for digital coins. So the main costs of the business are the power needed to keep the servers running, and revenue comes in the form of the value of the coins that are mined.

Even though the Argo Blockchain share price is down 30% in a month, it’s still up over 5,000% in the past year! To me, this is one of the reasons why in the short term the share price may struggle to keep up with industry moves. 

In fact, most of the rally in the share price has come over the past six months. The gains have far exceeded the moves in Bitcoin and Ethereum, with even the Coinbase move being small in comparison. Logically there was going to come a point when investors would pause and think about the fundamental value of the stock. It simply couldn’t keep moving higher at its previous pace.

My outlook for the Argo Blockchain share price

So will the Argo Blockchain share price continue to move lower based on the fundamental value? This is a tough question to answer. As a business, Argo is continuing to perform very well. Earlier this month it announced that it had mined 165 Bitcoins (or equivalent) in March, a record. This was up from 129 Bitcoins in February, which was a previous record in its own right.

Q1 revenue came in at around £13.5m, so if I double this then I could perhaps forecast H1 2021 revenue of £27m. H1 2020 revenue was £11.12m, which translated to EBITDA of £3.23m. If I assume the same margin for H1 2021, it would put EBITDA at roughly £7.83m. 

The current market capitalisation is circa £630m. Does a valuation of £630m for a company generating earnings of £7m-£8m in H1 seem fair?

As one comparison, consider Halfords Group. The market capitalisation is similar but slightly higher than Argo Blockchain at around £740m. In the latest update, it expected full-year profits to be between £90m-£100m. So there’s a clear difference in valuation versus profitability. 

This is just one example, and I completely get that Halfords is in a different industry and a mature company. Yet the numbers don’t lie, and so I think the Argo Blockchain share price could see a further correction as the market capitalisation moves lower.

I can argue that the share price is based on future expectations, given how quickly earnings are rising. This is valid, but again it’s easy for earnings to rise when they’re at a relatively small figure. So on balance, I’m not going to be buying Argo Blockchain shares right now, and am waiting for a further move lower.