Bitcoin mining with green energy.


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In today’s equities market, many companies are getting crushed and Bitcoin miners are no exception. However, when considering that CleanSpark (NASDAQ:CLSK) is profitable, its business is rapidly growing, and its stock price is already down 83% from its January 2021 highs, I believe the risk/reward opportunity is starting to look promising for long-term investors wanting exposure to the Bitcoin mining industry.

CLSK stock chart

CLSK Stock Chart (TradingView)

Renewable Energy and Profitability

The key to success in the world of Bitcoin mining is to source cheap energy. But, with the climate concerns raised by Tesla’s (TSLA) Elon Musk and other ESG investors such as Larry Fink of BlackRock (BLK), a Bitcoin mining company must also obtain a majority of its energy through renewable sources to attract institutional capital. Luckily for CleanSpark, they have access to both clean and cheap energy.

Leveraging their more three decades of energy technology experience and using an inexpensive energy supply containing mostly nuclear, hydroelectric, solar, and wind, it only costs CleanSpark $4,500 in energy to mine one Bitcoin. This is significantly less than the $28,957.79 to $68,906.48 range Bitcoin has traded in during the past 52 weeks. But, even if Bitcoin was trading at its 52-week low, CleanSpark would still net some juicy margins. In fact, when factoring in total operational costs, they reported a Q1 2022 gross margin of 79%. With CleanSpark’s stock price down over 83% since the Bitcoin euphoria of 2021, investors should take a serious look at the bull case for this Bitcoin mining company.

BTC stock chart

Bitcoin Stock Chart (TradingView)

Undervalued on a Novel Metric

Bitcoin mining is a nascent industry. And although traditional valuation models and metrics should be used to gauge the investment thesis of Bitcoin miners, new valuation methods must be adopted to analyze this new asset class. One such metric I believe is pertinent to evaluating a Bitcoin mining company is the hashrate to market cap ratio (H/M). This ratio demonstrates how much Bitcoin mining power a company has per value of invested capital.

For starters, Hashrate refers to the total combined computational power that is being used to mine and process transactions on a Proof-of-Work blockchain. CleanSpark’s 2,300 petahash/second hashrate means they perform 2,300 quadrillion calculations in one second, giving them a leading edge when solving the complex computational problems needed to create a block and earn the Bitcoin mining reward.

Moving forward, CleanSpark’s eye-popping hashrate and relatively low market cap of $269 Million gives them the most attractive hashrate/market cap ratio out of the top publicly traded Bitcoin mining companies. Those include Bitfarms (BITF), Core Scientific (CORZ), Hut 8 Mining (HUT), Riot Blockchain (RIOT), Hive Blockchain Technologies (HIVE), and Marathon Digital Holdings (MARA).

According to recent Bitcoin mining data, CleanSpark’s hashrate of 2,300 petahashes/second (PH/S) and market cap of $269 Million, produces a H/M ratio of 8.55 PH/S. With a score of approximately 48% less at 4.44 PH/S, the second highest Bitcoin mining H/M ratio goes to Bitfarms and Core Scientific. While some publicly traded Bitcoin miners have much more mining power, when normalizing for market cap, it is clear that CLSK provides best bang for the buck. Simply put, the market has overlooked and undervalued CleanSpark’s ability to mine Bitcoin when compared to its peers.

Hashrate to Market Cap Ratio of Major Bitcoin Miners
May 2, 2022 CLSK BITF CORZ HUT RIOT HIVE MARA
Hashrate (PH/S) 2300 2700 8300 2540 4300 2000 3900
Market Cap (Millions) 269 607.78 1869 620 1189 617.7 1608
Hashrate / Market Cap 8.55 4.44 4.44 4.10 3.62 3.24 2.43
Created by Austin Sonnier with data from Hashrate Index

graph of hash rate to market cap ratios

Created by Austin Sonnier with data from Hashrate Index

Growth

CleanSpark’s revenue is rapidly growing, their finances are improving, and they are developing highly beneficial strategic partnerships. Total Q1 2022 revenue is up roughly 1,700% year over year, from $2 Million to $41 Million, as they significantly ramped up their Bitcoin mining operation. CLSK’s net income turned positive from a $7 Million dollar loss in Q1 2021 to a $14.5 Million gain in Q1 2022.

CleanSpark is also expanding via strategic partnerships. Their recent partnership with Lancium, a Texas-based energy technology and infrastructure company, has secured access to 200 megawatts of Lancium’s renewably powered data centers with an option to add 300 more megawatts of capacity in the future. Management expects this strategic partnership will increase their hashrate by 400%, doubling their previous full year 2022 guidance.

CleanSpark’s growth is being noticed across Wallstreet. The Financial Times listed them as the 44th fastest growing company in North, Central, and South America when ranked by revenue growth. CleanSpark’s impressive execution is starting to garner attention. But despite the buzz that CLSK is creating, the fear, uncertainty, and doubt surrounding the future of cryptocurrency still has institutional and many retail investors largely on the sidelines. While they wait to see how Bitcoin miners will perform throughout the current Bitcoin and equities bear market, I believe this is a potential entry point for intrepid investors with a three- to five-year timeline.

HODL Strategy

CleanSpark mines, or mints, 9.9 Bitcoin per day. While they strategically sell some of their mined Bitcoin at profitable prices, CFO Gary Vecchiarelli says they expect to incrementally increase their Bitcoin holdings over time because of the high likelihood of significant Bitcoin price appreciation. Furthermore, CleanSpark’s Bitcoin stack increases their optionality. By holding, and not just selling, the Bitcoin it mines, management can extract more value per Bitcoin by potentially borrowing fiat against it to fund operations or earning yield on it, typically in the range of 3-8%.

Their Bitcoin cache bolsters their balance sheet and gives them an attention-grabbing price to book value (P/BV) of 0.68. The market is intrinsically valuing CleanSpark at a 32% discount to the value of its assets. By this metric, CleanSpark is less expensive compared to its publicly traded peers like Marathon Digital Holdings, Hut 8 Mining, and Riot Blockchain which trade at a P/BV of 2.35, 1.35, and 0.87, respectively. CleanSpark, although growing at 1,700% year over year, has a significantly lower P/BV than many traditional value stocks, such as JPMorgan (JPM) and Berkshire Hathaway (BRK.B), which reported year-over-year growth of only 4.43% and 12.46%, respectively. At 1.58 and 1.41, respectively, their P/BVs are more than double CleanSpark’s.

To add some icing on the cake, CleanSpark has no long-term debt and in the Q1 2022 earnings call management states that they will not issue any equity while their stock continues trading at a significant discount to their peers.

P/BV chart

Price to Book Value (P/BV) of Bitcoin Miners (Seeking Alpha)

More Than Just a Bitcoin Mining Company

Founded in 1987, CleanSpark’s over three decades of energy technology innovation and intellectual property gives them a diversified revenue stream and an edge over new upstarts in the Bitcoin mining field. It is important to note that 10% of CleanSpark’s revenue is generated from their non-Bitcoin businesses adding ballast to their financials throughout Bitcoin’s boom and bust cycles.

Their non-Bitcoin segment, which consists of CleanSpark’s smart energy hardware, software, and services segment, saw a year over year revenue increase of 1,333%. I do not expect this growth to end any time soon. In fact, the International Energy Agency predicts investment in this sector to more than double in the next four to eight years as the global economy pushes towards net zero carbon emissions. For the foreseeable future, I believe CleanSpark’s energy business will continue to capture more market share in this ever expanding smart energy market, adding merit to their investment bull case.

Grid Investment Outlook

International Energy Agency

Company Culture

When analyzing the investment bull case of a company, it is important to check in on company culture. I like to see that CleanSpark is investing in their employees by increasing employee compensation in order to attract the best talent. At their Nevada mining facility, they raised their entry level operations position starting pay to $19 per hour and provide employer-paid health insurance and generous paid time off. For comparison, the minimum wage in Nevada is $9.75. CleanSpark is going above and beyond to invest in its employees by nearly doubling the state’s required minimum compensation rate.

On a different note, I am concerned with a lack of diversity in CleanSpark’s leadership. In fact, their entire executive team consists entirely of white males. In addition, everyone on their board of directors is male. To bring a more well-rounded business perspective to the company, I would like to see CLSK add women and persons of color to their executive team and board of directors.

The Bottom Line

CleanSpark and other Bitcoin miners typically have a higher beta, volatility, than Bitcoin and the overall stock market. If Bitcoin goes down from here to retest the summer 2021 lows of $29,000, you can almost certainly expect the price of CleanSpark to follow suit in perhaps an even more violent fashion. For this reason, unless investors believe in the long-term price appreciation of Bitcoin, they should stay away from CleanSpark. Potential shareholders should also keep track of CleanSpark’s concerningly low quick ratio of 0.49, indicating they can only pay off half of their current liabilities with their near-term liquid assets.

All that said, CleanSpark’s decades of experience in the energy technology sector, best-in-class hashrate for a given market cap, 1,700% year-over-year revenue growth, improving net income, low price/book, strategic Bitcoin reserves, and successful non-Bitcoin businesses help make this $269 Million company one of the most investable, overlooked Bitcoin miners today.





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