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Riot Blockchain, Wayfair, Nikola Corp and CNH Industrial highlighted as Zacks Bull and Bear of the Day

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·14 min read
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For Immediate Release

Chicago, IL – November 2, 2021 – Zacks Equity Research Shares of Riot Blockchain, Inc. RIOT as the Bull of the Day, Wayfair Inc. W as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Nikola Corporation NKLA and CNH Industrial N.V. CNHI.

Here is a synopsis of all four stocks:

Bull of the Day:

It's time to gain exposure to the skyrocketing cryptocurrency market as a tidal wave of curious individual and institutional investors alike pour into this booming asset class.

Riot Blockchain, now one of the world's largest public bitcoin miners following its recent acquisition of Whinestone US, is positioned to provide us with the rare and exciting opportunity to profit off the surging crypto market's already prolific rally. 

Bitcoin rallied 125% in just three months (lows on July 20th and highs on October 20th) to notch a fresh all-time high just over $67,000 a coin, remaining buoyantly above $60K today. Roughly $1.5 trillion of value is being added to this legitimizing asset class as deep-pocketed institutional investors begin to deploy capital into this ambiguous market. The opportunity cost of not being a part of this rapidly appreciating asset class is just too great not to have some exposure.

RIOT, which is closely tied to the performance of bitcoin, had initially overshot the crypto rally in the first month and a half of the year as momentum chasing traders such as the (self-proclaimed) "degenerates" on r/WallStreetBets (WSB) drove this leading miner's shares far above their intrinsic value. RIOT surged as much as 385% at the beginning of 2021, but its momentum-driven valuation bubble has since deflated. The stock is now trading over 65% below its highs to the value opportunity we see today.

At the beginning of the year, euphoric purchases of short-term call options drove RIOT's moonshot price action, pushing it further out of institutional investors' scope of investible assets, and giving it the WSB seal of overvaluation. RIOT has fallen so far out of favor with the markets as of late that it has come down to a PEG (P/E to growth) of 0.67x (anything below one is considered undervalued), a discounted valuation multiple that can't be ignored amid this crypto explosion. 

With bitcoin's ripping rallying staying alive coupled with Riot Blockchain's continuous operational enhancements as its scales, analysts are getting increasingly bullish on RIOT, inflating EPS estimates across all timelines and propelling the stock into a Zacks Rank #1 (Strong Buy). 

All 5 of the covering sell-side analysts call RIOT a strong buy today, with an average price target of $52 a share, with some more bullish analysts giving it targets north of $80 (nearly 200% upside from here).

The Catalysts

US cryptocurrency miners were given one the greatest gift they could have asked for when China and Xi's increasingly autocratic regime announced a reinforced ban on crypto mining earlier this year. 

12 months ago, China controlled roughly 70% of the global bitcoin mining market, which is measured using hash rates. Hash rates are the speed at which cryptocurrencies are mined (attained through machine-based problem solving) and represent a measurement of computing power & efficiency (performance) of both individual & total market operations. 

The strict crypto mining banned in Asia's largest economy created a massive market hole, which US miners like Riot Blockchain quickly filled. The US is now the leading bitcoin miner by hash rate, controlling over 35% of this market, according to data from Cambridge Bitcoin Electricity Consumption Index (CBECI). 

Riot blockchain currently controls over 6% of the US's highly fragmented bitcoin mining market and is taking more share on a seemingly daily basis. This blockchain innovator's hash rate has more than quadrupled in the past year. Riot's savvy management team is projecting its hash rate will reach 4.4 EH/s (doubling its rate in September) before this year is up and reach 7.7 EH/s by the end of 2022.

Its recent acquisition of Whinstone (the largest US crypto mining facility in the US) is the primary catalyst for its rapidly improving economies of scale forecast.

First Bitcoin ETF Hits Exchanges 

Following SEC Chair Gary Gensler's landmark approval, the first bitcoin-linked exchange-traded fund (ETF) hit the NYSE last month. Bitcoin soared over $65k for the first time in history following this ETF's debut as institutional interest was further validated.

ProShares Bitcoin Strategy ETF became the first bitcoin futures-backed ETF to trade in the US, and its premiere performance was outstanding, with inflows of nearly $2 billion in its first two days of trading. This was a milestone for the crypto market as its futures ETF approval opens the door for institutional funds and wary investors to obtain exposure to this dubious (yet profitable) crypto market through trusted US government-approved exchanges. 

CME bitcoin futures (representing forward-looking derivative of the underlying asset) are the trusted crypto conduit the SEC is comfortable with exposing to the NYSE due to its regulatable nature – something that Defi (decentralized financial exchange) platforms, in which untraceable bitcoin trades, cannot claim. 

The one primary issue surrounding this conduit for bitcoin exposure is that futures contracts will need to be continuously rolled over to the front-month contract, which will cost money and cause decay to the ETF's value regarding bitcoin over time. You see this type of decay with virtually all commodity ETFs, similarly based on futures contracts. 

Nevertheless, this SEC approval is a massive step towards legitimizing the crypto space, gaining unprecedented market traction in recent years. Today marked a significant stride towards actual bitcoin-supported ETFs, but Gary Gensler and the rest of the apprehensive SEC will need some convincing before this occurs. 

Bitcoin bulls are on the hunt for $70k (trading within 1% of this level), which would mark a fresh all-time high for this currency of the future. 

Energy Concerns

There has been growing attention surrounding the excessive use of energy required to power bitcoin mining facilities. Elon Musk is the most notable character voicing concerns about the use of fossil fuels to power digital asset mining operations, deciding to halt Tesla's bitcoin usage earlier this year because of it. Energy is also the most significant variable cost for blockchain-based enterprises like Riot, so it's central to assessing an investment in this unique space.

Riot's primary operations are in Texas, ironically one of the cleanest and cheapest energy states (considering it's the oil capital of the US). The Electric Reliable Council of Texas (ERCOT) powers one of the few deregulated energy markets with a vast competitive push towards inexpensive and sustainable sources. Wind and solar make up nearly 30% of the ERCOT market's energy capacity, with relatively lower-carbon natural gas generating just over half.

Free-market energy in Texas provides Riot with relatively inexpensive variable costs from increasingly clean sources.

Final Thoughts

Like it or not, bitcoin is here to stay, and it's time to get some portfolio exposure, if you haven't already. RIOT presents us with a unique opportunity to obtain bitcoin exposure at a sizable discount as its underlining profit driver takes flight, and its own controlling market share proliferates.

RIOT has a significant competitive advantage in a market where scale means everything, with its recent acquisition of Whinstone leapfrogging its hash rate expansion. I would jump on this trade today before the window of opportunity for this rare high-growth value-play disappears.

Bear of the Day:

E-commerce platforms have exploded since the pandemic locked the world down and sent consumers online. Wayfair, a leading digital platform for purchasing furniture and home décor, has been one such beneficiary of COVID-19 with an over 1,600% share price surge from its pandemic lows last March to its all-time high in mid-January. However, W has traded sideways since last summer as investors realize the one-off nature of the pandemic's DIY boom.

After the disappointing e-commerce results from Amazon's wage pressured quarterly report last week, I feel that it would only make sense that Wayfair's smaller operation would follow suit, especially when considering its Q2 results exhibited negative growth. I think it's time to pull profits off this COVID winner, as society's online-driven home improvement binge decelerates, ahead of its Q3 earnings report Thursday morning (10/4). 

Analysts have lowered their EPS estimates for the next couple of years, reining in their initial overzealous projections, pushing W into a Zacks Rank #4 (Sell). Let me be clear here, I am not suggesting that you short sell this stock, but if you are a current stockholder, it may be a smart move to take profits here and move on to something with higher return potential. 

The Business & My Concerns

Wayfair and its home goods-focused digital platform have been gaining traction for years, with revenue expanding at a compounded annual growth rate (CAGR) of 44% (with the exception of Q2's revenue miss). Still, prior to 2020, the company was experiencing continuously deeper bottom-line deficits the larger its sales grew (for 5 years), pointing to some systemic issues with the business's ability to scale. 

2020 was Wayfair's golden year, and you can see this in both its financials and stock price. Its net income flipped from a deficit of $(982) million in 2019 to a robust profit of $242 million. My concern is that this profitability isn't sustainable in the post-pandemic world. 

During the lockdown, people were spending way too much time in their homes, which catalyzed this desire to redecorate and engage in do-it-yourself (DIY) home projects. There has been a boom in spending on furniture and home goods, and Wayfair's ecommerce platform was perfectly positioned to capture this demand from quarantined customers. 

The thing about furniture and housing décor is that many people want to see it in person before dropping a sizable amount of money on a new couch, patio furniture, etc. The argument can be made that customers have become conditioned to purchase things off Wayfair instead of going to their local furniture store. However, the fact of the matter is that even if this is true, people will still not be spending as much money on these items when the economy opens up. Consumers will be pivoting their budgets away from decorative pillows and towards things like travel and restaurants. 

I am worried that this company will not be able to maintain its profitability in the post-pandemic world, and even if they do, it will not see the same growth rates that it saw amid the lockdowns. 

Final Thoughts 

W currently has 3 sell ratings on it, which is a red flag because sell ratings are not handed out nearly as often as buy/hold ratings (considering that the stock market, on average, always goes up). Wayfair is also sporting an over 200% debt-to-total capital ratio as it leverages its operations to the gills, pushing shareholders' equity deep into negative territory, another big red flag. If the company is unable to maintain profitable growth, it may be in real trouble. Again, I am not recommending that you short this stock. Just consider reallocating the capital to a more topical investment such as Riot Blockchain, my Bull Of The Day.

Additional content:

Factors Shaping the Fate for Nikola (NKLA) This Earnings Season

Nikola Corporation’s third-quarter 2021 results are scheduled to be out on Nov 4, before the opening bell. The Zacks Consensus Estimate for the quarter’s loss is pegged at 26 cents per share.

In the last reported quarter, Nikola incurred a loss per share of 36 cents, narrower than the Zacks Consensus Estimate of a loss of 48 cents.

Over the preceding four quarters, Nikola surpassed the Zacks Consensus Estimate on all occasions, the average surprise being 27.9%.

Trend in Estimate Revisions   

The Zacks Consensus Estimate for Nikola’s third-quarter loss per share has widened by a penny in the past 60 days. Nonetheless, this compares favorably with the year-ago quarter’s loss of 31 cents per share.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Nikola this time around. The combination of a positive Earnings ESP, and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), increases the odds of an earnings beat, which is not the case here. This has been elaborated below.

Earnings ESP: Nikola has an Earnings ESP of +0.00%. This is because the Most Accurate Estimate is pegged at par with the estimate loss. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Nikola carries a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors in Play

During the quarter under review, Nikola expanded its sales and service network by adding 51 locations across the United States, bringing its total number of U.S. sales and service locations to 116. The company also scaled up its dealership network for its Class 8 truck sales and service coverage with the addition of Alta Equipment Group and Quinn Company. In September, Nikola teamed up with Bosch Group companies allowing the former to utilize fuel-cell power modules using the technology licensed from Bosch, providing Nikola vehicles cost and performance advantages.

During the quarter under discussion, Nikola and Iveco, the truck and bus business of CNH Industrial, inaugurated the joint-venture (JV) manufacturing facility in Ulm, Germany, dedicated to the development of the Nikola Tre electric heavy-duty trucks. The first Nikola Tre models produced at the facility, which is ready to start production by year end, will be deployed for select customers in the United States in 2022.

The companies also announced their collaboration for the testing and subsequent implementation of heavy-duty EVs and charging infrastructure at the Port of Hamburg during 2022. The companies signed a Memorandum of Understanding (MOU) with the Hamburg Port Authority, which states their intent to partner in two phases involving the delivery of 25 Nikola Tre BEVs to the Port throughout 2022, making the Port of Hamburg its pilot customer in Europe.

The above-mentioned series of developments are crucial for advancing the future of zero-emission transportation and building a hydrogen economy. This is likely to have been beneficial for Nikola’s third-quarter performance.

However, Nikola, currently in the pre-revenue stage, has been incurring elevated capital expenditure and R&D costs, in a bid to develop and test state-of-the-art technologies, as well as add new sales and service locations. This is expected to have dented the company’s third-quarter margins.

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