Since the start of 2021, the Argo Blockchain (LSE: ARB) share price has increased an incredible 300%. Over the past year the performance has been even dizzier, putting on around 3,350% in that period.
Here I analyse what has driven this performance. I also explain what I plan to do next.
Growth recipe
The company has a fairly standard sounding business model – running data centres. But it also has a specific customer focus: cryptocurrency miners. As well as offering services to customers, Argo itself mines cryptocurrency.
The company announced its full year results today. They showed growth on many fronts. Revenue was up 120%. Earnings before interest, tax, depreciation, and amortisation (EBITDA) rose from £1.4m to £7.9m.The company turned a net loss of £0.7m the prior year into a net profit of £1.7m.
Those results cover 2020. But the company also noted that the first quarter of 2021 has been its most profitable ever. Revenues jumped to £13.4m.
Argo Blockchain share price drivers
Clearly the company has been performing well lately. But I think there is more to the share price jump than that.
As well as operating the data centres, the company holds some cryptocurrency itself. At the end of last month, its 764 Bitcoin and equivalents were valued at almost £33m based on the market price.
So I think investors have been buying into more than one investment thesis when it comes to Argo Blockchain. One is about its potential as a targeted data centre operator. Alongside that is an investment case based on the company’s own cryptocurrency holdings.
Taken together, does this justify a market cap of £720m?
Argo Blockchain share price valuation
On a conventional metric such as price-to-earnings, the Argo Blockchain share price looks overblown to me. The current P/E ratio using the net earnings released today would be 424.
Historical earnings are not necessarily a guide to future ones, especially in a fast moving space such as this one.
How else might one value Argo Blockchain? Future earnings are hard to estimate in my view, as they rely to some extent on demand for cryptocurrency mining and pricing for such digital currencies. Both may swing wildly. That could drive the Argo Blockchain share price much higher – or lower.
Investment or speculation
Looking at the recent returns on the Argo Blockchain share price, I am reminded of the ‘tulip mania’ that gripped the Netherlands in the seventeenth century. Charles Mackay describes it in his book Extraordinary Popular Delusions and the Madness of Crowds.
Then as now tulips were attractive flowers. But pricing stopped being about how much one thought the flower was worth. Instead it switched to being determined by what one thought the next buyer might pay for it. People ignored whether they were overpaying for tulips because they thought they could quickly sell them on at a profit.
That isn’t investment. It’s speculation.
I think there are some investment characteristics to Argo Blockchain – it is a growing business with a proven model. However, barriers to entry in the industry are low. That adds competitive risks.
The share run up looks more driven by speculation than investment to me. As an investor I will stick to finding stocks based on well-defined investment principles. I won’t be buying Argo Blockchain shares.