Marathon Digital Downgraded to Sell Rating by Compass Point on Declining Profitability

Marathon Digital Holdings, Inc. (MARA) has been downgraded to a sell rating from neutral by investment bank Compass Point. This decision comes as the bank also reduced its price target for the company from $25 to $9.50, indicating a potential downside of over 25% from the current price near $13.

The downgrade is primarily attributed to Marathon’s declining profitability and significant cash burn at current operational levels. Analysts at Compass Point highlighted that Marathon’s hash price, now below 5.5 cents, signals a decrease in profitability. This cash burn could lead to shareholder dilution, making the company less attractive to investors.

Marathon Digital’s business model revolves around bitcoin mining, which involves earning BTC through the provision of computing power. However, the economics of this process have become strained due to shrinking mining rewards and persistent energy costs. Additionally, Compass Point argues that Marathon trades at a premium to the price of bitcoin itself, which is unfavorable for investors seeking exposure to the asset.

The downgrade occurs against a backdrop of a broader slump in high-performance computing (HPC) and AI infrastructure plays. Peer companies such as Core Scientific and TeraWulf have also underperformed year-to-date as investor enthusiasm around AI has cooled. Concerns over customer concentration, pricing risks, and slowed capital expenditures from major players like Microsoft have dragged down valuations in the HPC sector, with multiples dropping from as high as 15x last year to around 5x currently.

Despite these challenges, Compass Point acknowledges potential long-term tailwinds for the sector, including rising demand for AI infrastructure and capex commitments from cloud providers. However, they maintain that Marathon’s fundamentals are currently too weak to justify its market valuation, leading to the sell rating.