The Argo Blockchain share price has fallen: should I buy or sell?

It had to happen eventually. After climbing 1,200% in one month to a record high of 145p, the Argo Blockchain (LSE: ARB) share price has fallen. As I write, the Bitcoin miner’s stock is trading at around 101p, down by around 30% from its 7 January high.

Is ARB just pausing for breath, or has the firm’s rocketing share price already peaked? That’s what I need to know before deciding whether to buy shares in this business, whose revenues quadrupled during the first half of 2020.

ARB share price vs Bitcoin

One thing I’m sure of is that Argo’s progress will continue to be closely linked to the Bitcoin price. Bitcoin peaked at almost $42,000 last Saturday. Since then, it’s fallen by more than 15% to under $35,000.

Argo Blockchain’s share price movement reflects this. The stock peaked on 7 January and fell sharply when markets reopened on Monday 11 January (unlike Bitcoin, shares don’t trade over weekends).

This makes sense to me. Argo gets paid in Bitcoins for its mining activities. So the firm’s revenue growth is a multiple of the number of Bitcoins it mines, and the price of those coins.

Here’s a problem

As I understand it, the difficulty of mining new Bitcoins increases as computing power is added to the network. As the Bitcoin price has risen, Argo Blockchain has been increasing its mining power. According to the latest update from the firm had 16,000 mining machines at the end of December. A further 4,500 new models are expected by February.

I’d guess that with Bitcoin at record levels, other miners are adding capacity too. All of this suggests to me that Argo Blockchain’s costs will rise if Bitcoin keeps rising.

If Bitcoin falls, mining costs might fall too. But Argo’s revenue (from selling new coins) would probably be lower too. I’d guess that lower revenue would cancel out some of the benefit of lower costs.

Argo’s revenue during the first half of last year was £11.1m, up from £2.9m during the first half of 2019. But the group’s profits fell during the same period as it cranked up spending on new machines. Argo’s half-year net profit was just £0.5m, down from £1m during H1 2019.

We don’t have figures for the second half of 2020 yet. But even if the company’s profits tripled during the second half of the year, that would still give an annual profit of just £2m. For a company with a market cap of over £300m, that seems mighty expensive to me.

Argo Blockchain share price: what I’d do

Argo has been a successful trade over the last six months. But at the current share price, I really don’t see this as a long-term investment. In my view, many years of successful growth are already priced-in to this stock.

If Bitcoin keeps rising, I think this business might eventually grow into its valuation. But I think a more likely scenario is that the valuation has reached bubble levels and will deflate at some point.

I don’t plan to buy any Argo Blockchain shares. Indeed, if I owned the stock today, I’d most likely sell.