In this piece, I have evaluated two technology stocks, Riot Platforms, Inc. (RIOT) and GigaCloud Technology Inc. (GCT), to determine the better investment. Comparing the fundamentals of these stocks, GCT appears to have better upside potential than RIOT for reasons explained throughout this article.
Tech stocks faced the brunt of the Federal Reserve’s aggressive rate hikes since last year. The tech-heavy Nasdaq declined more than 33% in 2022. Despite the headwinds, tech stocks rebounded strongly this year with the continued easing of inflation. Moreover, last month, the Fed held rates steady for the first time since January 2022, which came as good news for the tech sector.
Fed officials raised their interest rate forecasts for this year, signaling rates could reach as high as 5.6%, implying two additional rate hikes this year. Due to strong macroeconomic data, the central bank will likely resume rate hikes later this month. Further rate hikes could again put pressure on tech stocks.
However, the demand for technology services is expected to remain strong as enterprises invest heavily in digitizing their operations to improve their digital abilities. According to Gartner, IT services spending this year is expected to increase 5.5% year-over-year to $1.31 trillion.
RIOT failed to surpass the consensus EPS and revenue estimates in the first quarter. RIOT’s loss per share was $0.16 higher than analyst estimates. In addition, its revenue fell short of the consensus estimate by 4.5%. On the other hand, GCT’s EPS and revenue were above Street estimates. Its EPS beat the consensus estimate by 200%, while its revenue topped analyst estimates by 2.9%.
RIOT’s CEO Jason Les said, “RIOT achieved a number of important milestones and records during the first quarter of 2023. In spite of damage to our immersion Buildings F and G during severe winter storms in Texas in late 2022, we successfully reached new all-time highs for miner deployment, total hash rate capacity, and monthly Bitcoin production.”
“Riot’s vertically integrated strategy has once again positioned us during this quarter as an industry leader in low-cost, large-scale Bitcoin mining, and I continue to be excited to work with our team to achieve Riot’s vision of becoming the leading Bitcoin-driven infrastructure platform,” he added.
Commenting on the first quarter performance, GCT’s CFO David Lau said, “During the first quarter of 2023, we delivered record-breaking financial and operation results through our relentless focus on execution and as we benefited from the industry-wide normalization of ocean shipping freight cost.”
“The continued increase in our GigaCloud Marketplace GMV, as well as our expanded user base, are strong testament to the value we offer to streamline cross-border transactions of large parcel merchandise. As we look ahead, I am very excited for the opportunities as we continue to drive profitable growth,” he added.
On June 14, 2023, GCT announced that its board of directors had approved a share repurchase program to repurchase up to $25 million of Class A shares. The company expects its revenues to be between $140 million and $145 million in the second quarter.
When it comes to price performance, RIOT is the clear winner. RIOT’s stock has gained 226.1% in price over the past six months compared to GCT’s 15.9% gain. In addition, RIOT’s stock has gained 416.5% year-to-date, compared to GCT’s 24.4% gain.
However, here are the reasons I think GCT could perform better in the near term:
Recent Financial Results
RIOT’s total revenue for the first quarter ended March 31, 2023, declined 8.2% year-over-year to $73.24 million. Its adjusted EBITDA decreased 40.9% year-over-year to $7.50 million. The company’s net loss came in at $55.69 million, compared to a net income of $36.58 million. Also, its adjusted EPS declined 60% year-over-year to $0.04.
For the fiscal first quarter ended March 31, 2023, GCT’s total revenues increased 13.7% year-over-year to $127.80 million. Its adjusted EBITDA rose 186.5% over the prior-year quarter to $19.85 million. The company’s net income attributable to ordinary shareholders increased 264.9% year-over-year to $15.94 million. In addition, its EPS came in at $0.39, representing an increase of 200% year-over-year.
Expected Financial Performance
Analysts expect RIOT’s EPS for fiscal 2023 and 2024 to remain negative. Its fiscal 2023 and 2024 revenue is expected to increase 46.3% and 46.8% year-over-year to $379.21 million and $556.82 million.
For fiscal 2023 and 2024, GCT’s EPS is expected to increase 98.3% and 14.7% year-over-year to $1.19 and $1.37. Its fiscal 2023 and 2024 revenue is expected to increase 11.1% and 7.6% year-over-year to $544.54 million and $585.84 million.
Profitability
GCT’s trailing-12-month revenue is two times what RIOT generates. GCT is more profitable, with a net income margin and Return on Equity of 6.96% and 20.58%, compared to RIOT’s negative 238.23% and 48.54%, respectively. Also, GCT’s asset turnover of 1.29x compares to RIOT’s 0.18x.
Valuation
In terms of forward EV/Sales, GCT is currently trading at 0.48x, 93.9% lower than RIOT’s 7.87x. GCT’s trailing-12-month Price/Book ratio of 1.37x is 48.9% lower than RIOT’s 2.68x.
Thus, GCT is relatively more affordable.
POWR Ratings
RIOT has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. On the other hand, GCT has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. RIOT has an F grade for Value, in sync with its stretched valuation. On the other hand, GCT’s discounted valuation justifies its A grade for Value.
RIOT has an F grade for Quality, consistent with its poor profitability. On the other hand, GCT has a B grade for Quality, in sync with the company’s high profitability.
Of the 80 stocks in the Technology - Services industry, RIOT is ranked last, while GCT is ranked #3 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view RIOT’s ratings. Get all the ratings of GCT here.
The Winner
Increasing investments in digitization and the adoption of advanced technologies like artificial intelligence (AI), blockchain, Internet of Things (IoT) drive the demand for technology services.
Despite delivering solid returns recently, RIOT is best avoided now, given its exposure to risky and volatile assets like cryptocurrency. Moreover, crypto mining is a capital-intensive business, and with more interest rate hikes in the offing, the cost of capital will likely rise. This may hamper the company’s ability to grow and expand its profit margins.
On the other hand, GCT will likely benefit from the resumption of economic activities in China. Therefore, GCT could be a better choice now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Technology - Services industry here.
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RIOT shares fell $17.51 (-100.00%) in premarket trading Wednesday. Year-to-date, RIOT has gained 426.55%, versus a 16.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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