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Introduction
CleanSpark (NASDAQ:CLSK) is a clean Bitcoin mining company that also provides advanced software, controls, and technology solutions to solve modern energy challenges. The company operates in two segments: Digital Currency Mining and Energy. It develops sustainable infrastructure for Bitcoin mining, which is an essential tool for financial independence and inclusion. CleanSpark purchases Bitcoin mining equipment and infrastructure to increase its hashrate and expand its mining operations. The company’s offerings also consist of “intelligent energy monitoring and controls, intelligent microgrid design software, middleware communications protocols for the energy industry, energy system engineering, custom hardware solutions, microgrid installation, energy modeling, management and implementation services, traditional data center services, and software consulting.” This, I believe, creates synergies with and complements CLSK’s bitcoin mining business.
CleanSpark Is Doing Great Deals
As of June 21, 2023, CleanSpark announced the acquisition of 2 turnkey mining sites in Georgia with over 6,000 S19 XPs and S19J Pro+ miners for $9.3 million. This adds nearly 1 EH/s of hashrate, which will increase their total hashrate by over 50% to around 3 EH/s total at a time when the BTC price has crossed $30,000. CleanSpark got a “deal” >80% discounted price for hash rate factoring in the price of Bitcoin in 2022 vs now. In Apr 2023, CleanSpark had announced the acquisition of 6.3 EHs of Hashpower for $144.9 million which represented a $23 million per Exa-Hash/sec hash power, the new deal already represents over a 50% discount to the price paid per EHS in 2023. To further put the value of today’s acquisition in perspective:
In March 2022, Bit Digital (BTBT) had announced a $324 million deal to acquire 63,000 miners (2.4 EH/s) from Bitmain when Bitcoin was at $49,000. This had valued 1 EH/s at $135 million.
In January 2022, Marathon Digital Holdings (MARA) had purchased 78,000 of Bitmain’s newest S-19j Pro miners for $879 million when Bitcoin was, again, at $49,000. This deal effectively valued 1 EH/s at around $250 million.
In October 2021, HIVE Blockchain Technologies (HIVE) had purchased 30,000 MicroBT Whatsminer’s (1 EH/s of power) for $65 million when Bitcoin reached $66,930.
Also in May 2021, Riot Platforms (RIOT) had acquired Whinstone US for $80 million when Bitcoin peaked at ~$58,000. Whinstone’s facility in Texas had been 700 MW, representing 5-7 EH/s. This had valued 1 EH/s effectively at ~$20 million.
If you compare CleanSpark’s recent acquisition to previous acquisitions, it clearly seems to have secured an incredible deal, acquiring nearly 1 exahash of mining power for just $9.3 million, and this is at a time when Bitcoin appears poised for growth, fueled by the potential approval of Bitcoin ETFs from major fund managers like BlackRock (BLK) and Invesco, this purchase could provide major upside. SEC regulations may also benefit Bitcoin by driving a shift of value from lesser-known cryptocurrencies and irregulated tokens back into the blue-chip crypto options like Bitcoin. Let’s get back to CleanSpark metrics and data that lead to my recommendation:
Revenue and Income
Per Q2 reports, CleanSpark generated $42.5 million in revenue in Q2 2023, up 14% from $37.2 million in the prior year. Bitcoin mining revenue was $42.5 million, showing the vast majority of their revenue is now from Bitcoin mining, as intended.
Net loss for Q2 2023 was $18.5 million, compared to a $171,000 loss in the prior year. The increased loss was due to higher costs as CleanSpark continues scaling their operations. Adjusted EBITDA was $12.7 million, down from $19.6 million, as margins decreased with their growth investments.
Bitcoin Mining Operations Output
In Q2 2023, CleanSpark mined 1,871 bitcoins, more than double the 871 coins mined in the prior year. At their 16 EH/s targeted ETH, they would mine around 9,500-10,000 Bitcoin per quarter, which as of BTC price today is an estimated annual revenue of ~$56 million.
Operations seem largely on track according to CleanSpark’s plans. They have acquired most of the new miners needed to reach their 16 EH/s target by the end of 2023: 6.7 EHS by Q1 2023 + 6.3 EHS (Apr 2023) + 1 EHS (June 2023) which already represents 14 EHS so far as of June 2023.
Comparison To Industry Peers
CLSK today, trades under its book value at a P/B ratio of ~0.81, which suggests it is significantly undervalued in comparison to its peers like TeraWulf (WULF) at a P/B of 2.05 and MARA at a P/B of 3.56. Despite targeting a hash-power of 9EHs, MARA trades at a higher market cap compared to CLSK, which is on track to achieve 16 EH/s in hash-power by the end of this year.
Forecast Model, Outlook, and Risks
In my forecast model for CleanSpark, I assumed a conservative 14 EH/s of Bitcoin mining hash power, which it would be at after the close of its latest acquisition. I also assumed Bitcoin price remains at its current levels (~$30,000) and had it factor in mining difficulty adjustments due to the increase in interest in Bitcoin this year. The model with these parameters projected CLSK to reach a quarterly revenue between $80-100 million by the end of 2023, which is to the order of ~$320-400 million annually at that scale if the BTC market price stays at current levels. Profit margins would expand at that level, generating potential net income in the range of $5-15 million per quarter ($20-50 million annually) factoring in operating expenses, depreciation, equipment maintenance and energy costs, and some mining difficulty adjustments.
However, there are risks if Bitcoin falls into a bear market and if the mining difficulty increases significantly beyond expected figures. Also note that there is a projected block-reward halving next year, approximately in Apr 2024, which could impact revenue if Bitcoin does not continue to rise in market value (however, halving events historically have been followed by BTC bull runs). Profitability and margins could also come under pressure due to the short-term volatility in the Bitcoin price. Execution and miner acquisition/installation also present risks.
Financial Position
CLSK’s cash and Bitcoin holdings declined QoQ to $15.6 million as per Q2 2023 report, compared to that reported in Q1, as operations consumed more capital during this growth phase. But with higher hashrate and a potential market recovery, cash flows would likely strengthen significantly going forward from Q2 reported levels. In the Q2 report, there were no updates on energy services revenue but with a multi-year mining facility service contract, energy services could provide additional revenue or margin upside.
Summary
While the quarterly loss per Q2 report shows the impacts of scaling up a utility-scale Bitcoin mining operation during a bear market, CleanSpark seems to be executing well on its stated plans and the Bitcoin price gains seem to be another tailwind. In my view, CLSK is best positioned both in value and growth among other BTC mining peers (which are trading at a higher market cap than CLSK). At projected 16 EH/s, with even moderately higher Bitcoin prices, annual projected revenue and income potential from their Bitcoin business appears substantial, which should take CleanSpark towards profitability. However, potential Bitcoin price declines and market weakness could put pressure on financial results and growth. There are also risks around their ability to continue acquiring equipment and scaling at their targeted pace. But if achieved, I believe, CleanSpark has the opportunity to become a market-leading North American Bitcoin miner, with a strong base for future growth beyond 2023.
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