Why has the Argo Blockchain share price been falling?

Over the past year, the Argo Blockchain (LSE: ARB) share price has returned nearly 1,400%. Unfortunately, the majority of this performance occurred between the beginning of November last year and the middle of February. 

Over the past few months, the stock has stagnated. In fact, over the past six months, shares in the company have fallen by 33%. 

If this figure is taken in isolation, investors might believe that the company is struggling. That is just not the case. Even though the stock has underperformed the market, the organisation seems to be firing on all cylinders on a fundamental basis. 

This begs the question, what is going on with the Argo Blockchain share price? 

Improving fundamentals

After a year of growth, the cryptocurrency miner reported record revenues in the third quarter of 2021. Earnings before interest, tax, depreciation and amortisation (EBITDA) hit $26m for the third quarter. Meanwhile, its mining margin reached 85% during the quarter.

At the end of September, the group owned 1,863 Bitcoin and Bitcoin equivalents (BTC). It mined a total of 597 BTC during the three months to the end of September. 

Based on its performance so far this year, City analysts believe the company is on track to report a net profit of £43m for 2021. With an expansion of its mining operations planned over the next few quarters, analysts reckon profits can rise further next year.

They have pencilled in a net profit of £63m for 2022. If the company hits this target, it is currently selling at a forward price-to-earnings (P/E) multiple of just 9. 

This multiple does not make much sense. Typically, the market rewards higher-margin companies with higher valuations. With a Bitcoin mining margin of 85%, I think Argo qualifies as a higher-margin company. This could justify a higher valuation. 

What’s more, the valuation gives absolutely no account whatsoever to the value of the cryptocurrency on the firm’s balance sheet. 

Argo Blockchain share price concerns 

Despite all of the above, I can see why the market might be concerned about the company’s outlook. Argo is a cryptocurrency miner, and it has virtually no diversification. If the price of Bitcoin drops to zero overnight, the organisation’s business model will fall apart. 

In addition, there have been several high-profile frauds and hack attacks against cryptocurrency companies over the past couple of years. There will always be a risk the company could fall prey to hackers, which could incur unknown damages on the business. 

I think these are the main reasons why the market is taking a cautious approach to valuing the business. 

Nevertheless, I think the company remains one of the best ways to invest in the cryptocurrency industry for UK investors. That is why, despite the risks outlined above, I would buy a speculative position from my portfolio based on the current valuation and Argo’s growth potential.