Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Long Blockchain a Value Investment?

Long Blockchain Corp (NASDAQ: LBCC) is one of the most interesting stocks on the market today. The former beverage maker has some fascinating similarities with Berkshire Hathaway (NASDAQ: BRK.B).

Long was formerly a company called Long Island Tea whose managed decided to change the name and go into the cryptocurrency business. The company used to market iced tea, but its management has changed its focus to cryptocurrency.

The similarity with Berkshire Hathaway (BRK.A) is that company began life as a textile manufacturer. Then in 1965, a guy from Omaha named Warren Buffett took over the company and turned it into an investment vehicle. He reportedly started buying BRK.A for $7.50 a share back in 1962.

Now another low-value company, Long Blockchain is being transformed into an investment entity. One of its major investments will be cryptocurrency mining Long purchased 1,000 AntMiner S9 mining rigs on January 5, Coindesk reported. The units will be shipped to Iceland, presumably for use in a mining operation.

Long is issuing 1.6 million shares of additional common stock at $5.25 each to raise an additional $7.7 million. The strategy is an interesting one, and Long Blockchain Corp is cheap. It was trading at $5.79 a share on 9 January 2018.

Is Long Blockchain Making Money?

Value investors will ask the obvious question, is Long Blockchain making money? The answer is a resounding no.

Long reported an operating income of -$3.8 million, and a loss of $3.91 million on September 30, 2017. That income rivaled the operating expenses of $3.87 million. There was also a negative free cash flow of -$2.56 million and an operating cash flow of -$2.56 million.

So it is easy to see why the management changed the business plan so radically, the company was simply making no money. To add insult to injury, Long Blockchain’s revenues of $1.55 million were also a joke at the end of 3rd Quarter 2018.

An interesting advantage to Long Blockchain is its debt load, the company had liabilities of just $4.2 1 million on 30 September 2017, Stockrow data indicates. There is not much debt to pay off, so Long can begin accumulating large amounts of cash quickly if the cryptocurrency mining scheme works.

Long Blockchain is a Risky, Speculative Investment

This makes Long Blockchain a very risky speculative investment because it has no proven business plan. The old business plan made no money, and the new one is completely unproven.

Yet, the same thing could have been said of Berkshire Hathaway back in 1965. A lot of people then probably said “that Buffett guy has to be crazy for buying that broken down old textile mill. There’s no way he can make money at it, and a publicly-traded company that buys common stocks and profits from them that’s just nuts.”

Consumer investment in common stocks was viewed as a dangerous, risky, speculative investment back in 1965. A lot of people then had not touched stocks since 1929; because of memories of the Great Crash. Today people view cryptocurrency as a risk speculative investment – for good reason it is.

Something to remember about Long Blockchain is that a lot of the normal stock metrics; like earnings per share (EPS). may not apply to it right now because the business model is changing. Once the new model is in place, it should be possible to apply those metrics to LTEA.

The Long Blockchain Gamble makes Some Sense

The Long Blockchain business plan makes sense than you might think if it is done right. Cryptocurrency mining offers three potential streams of desperately needed revenue for Long.

The first stream of revenue is direct mining or harvesting of new cryptocurrencies from the blockchain. Many cryptocurrencies including Ethereum (ETH), Ripple (XRP), and Bitcoin (BTC) can be mined.  Once mined, the altcoins can be sold or borrowed against to raise more capital.

The second stream would come from selling mining services to the public or other companies. Many companies now offer cloud-mining services to the public including Genesis. These “miners” operate pools of mining rigs, anybody can pay to use their services online.

A third revenue stream can come from selling hash power to other miners. Hash power refers to the computer power needed to mine cryptocurrency. There are a number of marketplaces for hash power out there including Nicehash. Long can easily sell hash power directly to miners or through the markets.

Can Long Blockchain Make Money?

The flaw in this plan is that nobody knows if Long will be able to make money at it. All the mining pools are privately held, so we have no idea if they are making money or how much they are making.

Although some of the larger companies in the sphere like Genesis Mining appear to be making money. Genesis is able to operate a number of mining facilities in countries like Iceland so it must be generating some cash. A potential danger here is that Genesis might have borrowed the money to open those facilities.

Another scenario investors must consider is that companies like Long Blockchain; and Genesis, are receiving vendor credit from the Antminer maker Bitmain Technologies and other equipment providers. Bitmain might be shipping equipment to miners without charge, in exchange for a cut of the proceeds. That means Bitmain; not the miners, might be making the money so it would be the real value investment.

How Long Might become like Berkshire Hathaway or Google

If the mining is successful Long might be able to employ a strategy used by both Berkshire Hathaway and Alphabet (NASDAQ: GOOG).

The strategy is to find a business that generates a lot of additional of cash or “float.” Then use the float to finance acquisitions of or investments in other profitable companies.

Buffett used a variety of float generators to build Berkshire Hathaway including insurance companies, newspaper subscriptions, the World Book Encyclopedia, Blue Stamps, and newspaper advertising to name a few. Larry Page and Sergey Brin used the advertising revenue generated by the Google search engine to build Alphabet (NASDAQ: GOOG).

The billion dollar question here is can cryptocurrency mining generate that kind of float. Nobody knows the answer because the business model has never been tried before.

The dangers to Cryptocurrency Miners

Even if it succeeds there are many outside factors that can sink Long’s plans. Newer, cheaper mining technology, bans on cryptocurrency, or the appearance of government-generated cryptocurrencies can all derail its plans.

A nightmare scenario for Long would be a government; or central bank like the People’s Bank of China, mining cryptocurrency on a large scale and giving it away to the masses as an economic stimulus scheme. An even worse situation would be cheap new, mining technology – such as an app that allows everybody to mine using her or his smartphone.

Despite those risks, Long Blockchain is an interesting and fun speculative stock. If you are looking for a more transparent alternative to initial cryptocurrency offerings (ICOS) that is government-regulated, LBCC is worth a look. It is also so cheap, that owning a few shares will present little risk.

For those you who did not go to college in the United States, a Long Island iced tea is a dreadful concoction of whiskey and iced tea. It probably originated during Prohibition, when alcoholic beverages that looked nonalcoholic were in demand.

Correction: The Original version of this story misidentified Long Blockchain by its’ original ticker symbol of LTEA. We apologize for any confusion.