Summary FRMO Corporation remains a Buy, despite recent underperformance, due to its undervalued mix of unique investments and strong balance sheet. FRMO's strategic shift toward energy-efficient crypto mining, supported by robust liquidity, positions FRMO well for long-term growth amid rising energy demand. Recent GAAP losses were non-cash and driven by paper declines in Texas Pacific Land, while operational cash flow and levered free cash flow both more than doubled year-over-year. Valuation metrics such as EV/EBITDA and price-to-book are well below historical averages, indicating FRMO is attractively priced for patient investors. Thesis Back in January, I said FRMO Corporation ( OTCPK:FRMO ) was a good stock to buy. The company owns a mix of unusual investments, like shares in Horizon Kinetics and some Bitcoin (BTC-USD) mining businesses through Winland and Consensus, that I thought were worth more than the market was giving them credit for. At the time, FRMO was trading at about $10 per share, and since that recommendation, FRMO’s stock has dropped about 20%, while the S&P 500 ( SP500 ) has gone up roughly 11%. That gap certainly doesn’t look great, but the situation isn’t necessarily bad news. FRMO’s worth has always depended more on the long-term results of its mix of investments than on short-term price swings. All the same, after going over FRMO’s recent earnings, I still think the stock is undervalued, even though the price has dropped since my last update. The market seems to be missing the bigger picture, that is, FRMO’s strong balance sheet and ability to fund its own growth are setting it up well for the next stage of expansion. FRMO: Earnings and Direction In the first quarter, FRMO reported a GAAP loss mainly because the value of its investment in Texas Pacific Land ( TPL ) dropped on paper, as oil and gas prices fell earlier in the year. The company didn’t sell any of its TPL shares, so the loss was just on paper, not actual cash. In fact, FRMO’s liquidity got stronger. Cash increased to around $25 million, and management emphasized that they could quickly raise even more cash if needed. However, they don’t plan to do that right now because their focus is on turning FRMO into an active operating business centered on cryptocurrency mining, instead of staying a passive investment company. Overall, the macro economic picture actually supports FRMO’s move into crypto mining. By now, you already know that AI data centers are using a lot more power, creating a major increase in U.S. electricity demand, and, as a result, grid operators and utilities have been investing heavily to handle these massive hyperscale energy loads, and big tech companies are even starting to build their own power sources. For example, typical power usage efficiency ((PUE)) sits around 1.58 . That reason I bring that up is that the surge in energy demand directly affects the costs and investment strategy behind crypto mining. And for FRMO, the price and availability of power now play a significant role in deciding how quickly it can expand Winland and its other mining-related businesses without cutting into profits. Seen that way, the company’s choice to hold onto cash and depend on its own liquidity looks intentional . Growing a business that relies on heavy energy use takes careful financial management, and that’s exactly what this quarter’s numbers reflect. That said, looking at income, specifically, dividend income , fell to about $1.1 million from $4.4 million a year earlier, mainly because Mesabi Trust’s ( MSB ) unusually large payout last year didn’t happen again, so the year-over-year comparison is looking weaker than it really is. The reported loss for the quarter also came from that paper decline in Texas Pacific Land’s value I mentioned earlier, not from any real decline in business performance. Meanwhile, FRMO’s short positions in certain path-dependent ETFs increased, with the total cost of those securities sold short now over $11 million. Management noted that this has been a long-term strategy that continues to generate meaningful cash flow and usually gains value over time as those ETF products lose value naturally. Meanwhile, the cash brought in here helped pay for the company’s crypto expansion without having to sell any of its main investments. Management didn’t share details on profit margins, operating costs, or EBITDA, but the cash flow story does seem easy to follow: there were fewer one-time dividend payments, more steady cash coming from their systematic short positions (which don’t dilute shareholders), and that money was put back into growing their crypto mining operations. Strategic Holdings Overview From a strategy standpoint, FRMO owns about 44% of Winland and is still increasing its stake. If it goes over 50%, that would require combining the two companies’ results in its financial reports, changing how the numbers are presented. On the conference call, management explained that their crypto mining architecture uses scrypt-based mining , and that lets them mine Dogecoin ( DOGE-USD ) and Litecoin ( LTC-USD ) using the same electricity. Basically, they sell the Dogecoin for cash, hold on to the Litecoin, and use the cash they make to buy more Bitcoin. The reasoning is that after the Bitcoin halving, it’s harder to make money with ASIC mining machines. In contrast, scrypt-based equipment doesn’t face those sharp four-year drops in rewards and is less likely to become outdated quickly. Consensus Mining, which started trading about six to eight weeks ago, is using the same approach. By the way, FRMO owns 11,950 shares of Consensus Mining, out of a total of 2.2 million shares. Moving on to other parts of the portfolio, FRMO now owns 934,884 restricted shares and 11,396 unrestricted shares of Miami International Holdings ( MIAX ), that's after a reverse stock split. The company also has a small investment in the Texas Stock Exchange through its funds, but it’s tiny compared to its overall holdings. Management said this position could grow slowly over time, following, what I take, as the same learn first, buy over time strategy they used when investing in MIAX. On the accounting side, Horizon Kinetics is recorded using the equity method, which shows it at a value well below its market worth. Management said this is the right approach for an illiquid investment, meaning one that’s hard to trade. They mentioned that investors can figure out the true value on their own if they want, but the company plans to stick with a conservative GAAP accounting treatment. Meanwhile, the company's still keeping a close eye on its digital asset policy. Management said they directly hold about 259 Bitcoins, with bigger exposure coming from ETFs like Grayscale Bitcoin Trust ETF ( GBTC ), as well as through their stakes in Winland and Consensus. Ongoing attention from the IRS and U.S. Senate on how digital-asset taxes should work, including new temporary CAMT guidance about how unrealized gains might affect adjusted financial income, means that accounting rules for crypto held in treasury are still uncertain. However, most of FRMO’s crypto exposure comes through securities and investments, not through coins the company holds directly. FRMO’s Valuation I’m valuing FRMO by looking at both its earnings and cash flow compared to its own past results, and then checking that against its cash generation and balance sheet. Seeking Alpha Based on that, the stock does look cheap when measured against its five-year averages. The enterprise value (EV) to EBITDA ratio is 2.68, compared to a five-year average of 7.19. EV to EBIT is 2.69 versus 7.33. Also, the price-to-book ratio is 1.11, down from a five-year average of 2.06, and even the price-to-sales ratio is 4.16, which is about half its five-year average of 8.74. The cash flow side of things is somewhat trickier . The price-to-cash-flow ratio is 48.38, which is way lower than the five-year average of 240.35, but that still isn’t cheap. My take from this is that means the company needs to keep growing its operating cash flow to justify the price. Even so, the good news is that cash flow is moving in the right direction: cash from operations over the last 12 months was $7.73 million, which is up 111% compared to last year. Levered free cash flow also jumped 107%. FAST Graphs Overall, with a total enterprise value (per FAST Graphs above) of about $220 million, a market cap around $374 million, and long-term debt making up only 0.18% of total capital, the company’s balance sheet looks solid enough to give it time to grow without having to issue more shares. Final Takeaway I’m sticking with FRMO as a Buy. Even though it hasn’t done great in the short term and has shown some accounting losses, the company’s finances look healthy. It’s generating more cash, and the stock price is much lower than what it’s usually been worth based on past valuations. Overall, I think the management team’s careful handling of cash and smart move into energy-efficient crypto mining could make the stock worth a lot more over time than it is right now.
