The Argo Blockchain (LSE:ARB) share price is back on the rise. After tumbling by 50% between March and April this year, the stock has since started to recover and is now trading at around 181p. What caused this sudden recovery? And should I be adding this business to my portfolio?
ARB share price surges on earnings
Since the last time I looked at Argo Blockchain, two primary developments have occurred. The first is a signed partnership with Navier Inc. Under this agreement, Navier will be developing a new mining facility for the business in Texas that can support an electrical capacity of up to 200MW. The firms will also be working together in adding new immersion technology that should increase the working lifespan of mining rigs and thus reduce Argo’s maintenance expenses.
The second development, and seemingly most influential on the ARB share price, is the release of its 2020 full-year results. Given the stock jumped by more than 25% on the news, I think it’s fair to say investors were pleased. And I can see why.
The company successfully increased its mining volume by 85%, collecting a total of 2,465 Bitcoin throughout last year. This, in turn, led to revenue more than doubling from £8.6m in 2019 to £19m. And earnings before interest, tax, depreciation and amortisation (EBITDA) also surged from £1.4m to £7.9m year-on-year. This ultimately led to the business becoming profitable for the first time, with final net income landing at £1.7m versus a loss of £0.7m in 2019.
Needless to say, this is incredibly positive news. So seeing the ARB share price surge is not at all surprising to me.
The risks that lie ahead
While 2020 may have been the best-performing year for the business so far, it hasn’t been entirely smooth. Like a traditional mining company, Argo Blockchain has no control over the value of its core assets. And when dealing with Bitcoin, which is notoriously volatile, price fluctuations can substantially impact the business’s profit margins as well as the ARB share price.
Another unavoidable threat is the Bitcoin halving process. Never heard of that? Here’s a quick and simplified explanation. For every 210,000 blocks processed by miners, the Bitcoin reward per block is cut in half. This actually happened in May last year, which saw the Bitcoin reward per block drop from 12.5 to 6.25.
Consequently, this reduces the yield from the mining process by 50%. And Argo Blockchain’s profit margins fell from 60% in 2019 to 41% in 2020. The last time this happened was in 2016. And given there are far more mining rigs set up today, the next Bitcoin halving will likely occur within less than four years. And naturally, it will once again affect Argo Blockchain’s profit margins unless the Bitcoin price increases sufficiently to compensate.
The bottom line
I can’t deny that Argo Blockchain’s performance is impressive. The rising ARB share price is proof of that. But as I’ve explained in other articles, I’m still not personally tempted to invest in this business due to the high level of risk.
I believe there are far more promising companies available today that can achieve a higher level of growth. And so, I’m still not adding it to my portfolio.