Shareholders of cryptocurrency miner Riot Blockchain (NASDAQ: RIOT) had a tough year in 2021 with 1-year losses of around 23.43%, underperforming Nasdaq expectations.

So far, 2022 isn’t great for RIOT stock, either. It had losses of 8.82% in the first trading week of the year. Having a 52-week range of $16.75 – $79.50, investors who bought shares near the 52-week high have losses of around 73%. Can RIOT stock bounce back from its current price of $21.18?

I will cover two scenarios, the bullish and the bearish, and then get to my personal thesis.

Riot Stock Bullish Case

Based on production updates in November 2021, Riot produced 466 Bitcoin (CCC:BTC-USD). Compared to its November 2020 production of 117 Bitcoin, this represents an increase of about 163%.

The total number of Bitcoin Riot held as of late November 2021 was about 4,464 BTC. The bitcoin miner announced further expansion plans with an order of $33 million to buy 3,000 of the miner model S19XP (140 TH/s) from Bitmain Technologies Limited. Riot Blockchain anticipates deploying this equipment in the second half of 2022.

The main benefit from this purchase is that “as a result of this purchase order, Riot has increased its 2022 estimated hash rate capacity to 9.0 EH/s, representing an increase of approximately 0.4 EH/s over the Company’s previously announced estimate of 8.6 EH/s.”

Riot Blockchain has also announced important infrastructure advancements with the “first industrial-scale immersion-cooled deployment of Bitcoin mining hardware” at its Whinstone facility.

Among the top features that differentiate immersion-cooling from other cooling techniques in mining is a more stable operating environment. This itself boosts higher productivity. This productivity performance is not negligible, as “an estimated 25% increase in hash rate is expected, with an estimated potential to increase ASIC performance by as much as 50%.” The overall outcome of these figures is to make better use of capital and deliver higher return on assets ratios.

Turning to third-quarter (Q3) 2021 financial results, Riot Blockchain reported a record revenue of $64.8 million for the three months ending on Sep. 30, 2021. Year-over-year mining revenue rose by 2,099% to a record figure of $53.6 million, and the mining revenue margin increased to 76% versus 46% in the same period one year ago.

Most likely, bullish investors are happy as the company turned to profitability in 2021 and has a price-to-earnings (PE) ratio trailing twelve months (TTM) of 112.77. In the period of 2016 – 2020, the company posted a net loss for every year and net losses have been accumulating. Is a turnaround underway in 2022?

Riot Stock Bearish Case

Despite the record revenue in Q3 2021, a net loss of $15.3 million was reported. The loss was attributed to a non-cash stock-based compensation expense of $36 million and a loss of $11.1 million on marketable equity securities.

A previously announced $600 million ATM equity offering was completed, which is one of the main concerns for investors as shareholders have been substantially diluted in the past year, with total shares outstanding growing by 72.6%. That is a very large stock dilution.

There is also a continuous cash burn problem with a figure of negative 123.70 million free cash flow for Q3 2021. The capital expenditures come at a great cost, hurting free cash flow.

In the first nine months of 2021, the company has burned $243 million. That explains the need for the ATM equity offering.

Lastly, the drop of Bitcoin in 2022 is a main concern. The assets expressed in Bitcoin are reported on the balance sheet and that means they can be very volatile. So does revenue and profitability. In the scenario of Bitcoin collapsing in 2022 due to regulatory woes and a shift to risk-off investment helped by the U.S. Federal Reserve tightening its monetary policy, Riot Blockchain would have to face two problems: deterioration of its balance sheet and lower revenue generated.

What about valuation, is RIOT stock now cheap?

RIOT stock is relatively overvalued based on its PE ratio (153.8x) compared to the U.S. Software industry average of 44.2x. Based on its price/earnings to growth (PEG) ratio (4.5x), but seems relatively undervalued based on its price-to-book (PB) ratio (3.1x) compared to the U.S. Software industry average of 5x.

Overview on Riot Blockchain

The additional capital expenditures will harm free cash flow. Net profitability in 2021 is fragile and lower Bitcoin prices so far in 2022 do not support an optimistic outlook for the stock. As long as the cash burn problem is unsolved, I would avoid the stock. It does not seem cheap overall, either.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.