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I’ve been pondering Argo Blockchain (LSE: ARB) for some time now. The ARB share price rocketed in 2021, and then started on a long slide after peaking early that year. It’s still up 1,000% in two years, though.
It’s easy to get caught up in share price movements, particularly spectacular ones like this. But when investing in tech shares, it can often pay to step back and take a fresh look. That’s what I’m doing today.
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With any high-tech growth stock, my first question is: what is its key selling point? For Argo Blockchain, it’s simple. The company seeks to acquire as much computer processing capacity as possible to mine as much Bitcoin as it can.
It aims to build capacity as quickly as possible, partly to keep ahead of Bitcoin halving events. After the latest in May 2020, the block award fell from 12.5 to 6.25 Bitcoin per block. The next halving event will be in 2024.
Short-selling attack
The result of the expansion is that in 2021, Argo grew its Bitcoin mining capacity from 0.6 to 1.6 exahash per second (EH/s). The target stands at 5.5 EH/s for 2022, and to achieve more than 20 EH/s over the next few years.
Argo’s expansion has brought its share of controversy. In 2021, Boatman Capital launched a short-selling attack. As part of its criticism, Boatman argued that Argo had vastly overpaid for the land it bought in Texas to build a new crypto operation.
There were other criticisms, including that Argo shareholders were facing significant dilution of their holdings. This was all last year, but I’d be naive to assume criticism is over now and will not weigh on the ARB share price further.
ARB share price valuation
What about valuation? That’s where things become harder for me to get a handle.
By 31 March 2022, Argo had 2,700 Bitcoin and Bitcoin equivalents on its books, worth £84.2m at today’s prices. That’s a company with a market cap of £290m. So there’s clearly a lot of future Bitcoin mining output built into the current valuation.
At today’s level, the ARB share price might well turn out to represent an attractive buy. But I have one main problem. I have no idea what the company will look like in a few years time as it gets closer to turning expectations into results.
It could be storming ahead if it gets to 20 EH/s capacity. But it will cost a lot of money to get there. So if I buy Argo Blockchain shares today, what level of dilution will I be looking at in five years time? I have no idea.
Will I buy?
Whether I buy comes down to two of Warren Buffett’s recommendations. Firstly, don’t buy what you don’t understand — which is why he doesn’t buy tech stocks. In this case, I think I understand the technology well enough.
The other is that if I’m unwilling to own a stock for 10 years, I shouldn’t even think about owning it for 10 minutes. I have no idea where the cryptocurrency world will be next year, never mind in 10 years. So I will give ARB a miss.
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