APLD - HIVE Digital Technologies: Now An Artificial Intelligence Play

2023-07-21 13:27:26 ET

Summary

• I had previously recommended selling HIVE Digital Technologies due to Ethereum's shift from proof of work to proof of stake.
• HIVE, which relied on Ethereum mining for 40% of its revenue, saw its shares fall by 75% from August to December 2022.
• However, HIVE shares have since risen by 300% year to date, largely due to a significant rally in Bitcoin.

Almost a year ago, I initiated coverage of HIVE Digital Technologies (HIVE) with a "sell" recommendation. My rationale for that call was the impending reduction in revenue from Ethereum's (ETH-USD) merge from proof of work to proof of stake. Since HIVE relied on Ethereum mining for 40% of its revenue at the time, this was a pretty bearish development in my view. Eleven months later, HIVE shares are trading roughly where they were at the time of my last article; though it has been anything but a straight line.

After falling roughly 75% from late August through December 2022, HIVE shares are now up 300% year to date. This has been largely fueled by sentiment after a sizeable rally in Bitcoin (BTC-USD) this year and also from the Ordinals-fueled transaction fee spike in May. The latter of which has since subsided and BTC is now struggling to hold $30k. Fortunately for HIVE, there is an additional catalyst that is likely helping investor interest; "AI" hype is also aiding companies with Nvidia (NVDA) GPUs and high performance computing capacity.

The Pivot To AI Infrastructure Business

We can add HIVE to the growing list of Bitcoin mining companies that have opted to drop the word "blockchain" from their company name.

• Riot Blockchain is now Riot Platforms (RIOT)
• Applied Blockchain is now Applied Digital (APLD)
• HIVE Blockchain is now HIVE Digital Technologies

In the company's press release , HIVE noted an adapting business model and specifically mentioned ChatGPT, one of the more popular AI tools currently generating buzz:

To better represent the company's evolving focus on the revenue opportunities with our Nvidia Graphics Processing Unit cards in Cloud compute technology, and its mission to drive advancements in Artificial Intelligence applications such as ChatGPT, to support the new Web3 ecosystem.

At first glance, this pivot to AI somewhat resembles the 2017 crypto bull cycle when companies were finding ways to put "blockchain" into their names. Now we're seeing "blockchain" losing ground and it's "AI" that has captivated audiences on social media. But in fairness to HIVE, some of this was telegraphed last year when the company specifically mentioned high performance computing, AI, and rendering as possible ways to repurpose the company's GPU fleet post-merge.

With the name change to HIVE Digital Technologies, HIVE has an updated website and is also featuring a new product called the "HIVE Cloud" that will serve as the company's enterprise offering to small and medium-sized businesses that require HPC services. As far as I can tell, the company's new-look website no longer appears to contain the words "Bitcoin" or "blockchain" on the homepage at all.

In my view, this is a pretty large pivot from how the company was presenting itself just a few weeks ago. As recently as early June, visitors could find Bitcoin's live price near the bottom of the homepage and the phrase "power the future of blockchain computing" near the top. The language under our mission has now changed to "provides infrastructure for emerging technologies" after previously saying "accelerate the development of the blockchain sector" in early June. None of this is bad per se. But I think it does indicate how hard HIVE is leaning into AI and HPC services going forward.

FY 2023

HIVE recently reported fiscal year 2023 results. Revenue for the year was $106.3 million. That was down from the $211.2 million in FY 2022. In quarter ended March 31, 2023, HIVE did increase revenue sequentially from $14.3 million to $18.2 million. This revenue was almost entirely attributable to Bitcoin mining, but for the first time the company did breakout HPC services revenue. That figure came in at $0.2 million.

Operating income came in at negative $5.7 million, which was an improvement over the prior four quarters of operations. But the total performance for the year was rough to say the least. HIVE had $236.4 million in negative net income for FY 2023.

Balance Sheet

From an asset standpoint, HIVE still has a fairly large digital currency position and $87.2 million in plant and equipment. Cash is somewhat low at just $4.4 million, but the company does have access to quick liquidity if it opts to sell any of its cryptocurrency stack.

And it does appear as though we're starting to see that happen to a meaningful degree. HIVE has opted to completely sell down the company's Ethereum position and has elected to hold Ethereum Classic (ETC-USD) to a larger degree. Given the lack of meaningful activity on Ethereum Classic, this is a bit of a head scratcher to me.

However, it isn't just Ethereum that HIVE has been selling. At the end of March, the company disclosed 2,332 BTC on balance sheet. Three months later, that figure is now down to 1,957 BTC according to the company's BTC production update for June.

How To Value?

Given the clear pivot to cloud HPC services as a growth area, it's somewhat difficult to predict what investors can reasonably expect from the company for revenue going forward. We've already seen fellow Bitcoin mining firm turned HPC provider Applied Digital apparently having great success nailing down some of the world's large AI players to cloud service agreements.

For HIVE specifically, we don't know much about the company's revenue expectations for HIVE Cloud beyond the fact that HIVE is advertising 38,000 GPUs. What we do know is at 3 times book and at 14 times sales, HIVE is certainly not cheap.

We also know Bitcoin's hash rate continues to ramp higher. This has an important impact on HIVE's ability to generate revenue from its current mining model. If the company doesn't continue to scale EH/s in line with global hash growth, it loses share of the block reward. This isn't necessarily a death blow as long as Bitcoin is increasing in value. But that has not been the case over the last 18 months as BTC is still well off the highs from the prior bull cycle. The point is, HIVE is in a tough spot. It's facing diminishing long term returns on its BTC mining operation and what I believe will be a large amount of competition for HPC services from other BTC miners turned data centers.

Other Risks

The biggest immediate risk though may be the dilution that is likely coming to HIVE shareholders. In May, the company disclosed a shelf offering for up to $100 million in stock issuance. So far, a little under $2 million of that offering has been sold but I suspect that we may see more shares shortly. When the offering was announced, the average price of HIVE was $3.11 per share. Now at well over $5, I would not expect the company to pass up the opportunity to raise funds at this valuation while issuing fewer shares.

Another potential risk is the possibility that we're getting wildly ahead of ourselves pertaining to AI. Purely anecdotally, I'm engaging with a lot of people in my personal life who seem to be concerned with AI as an idea but very few are actually playing around with the technology. We can see in the search interest chart above from Google Trends, interest in AI is still very high - likely an indication of the fear mentioned above and the fact that people are talking about it. However, interest in the popular ChatGPT application appears to have peaked in May.

Investor Takeaways

It's interesting watching the migration from crypto and web3 to AI broadly speaking. Not just for HIVE specifically, but in the social zeitgeist as well. I maintain that there will likely be robust demand for HPC services in the future. In that environment, HIVE may actually have a viable product market fit given the amount of GPUs the company currently manages. But until investors get meaningful guidance from management pertaining to what kind of revenue can realistically be expected from those efforts, I think it's better to sit on the sidelines for now. Furthermore, given the recent run in the company's share price, I think it may actually be wise to lock in some gains or cut some losses with the shelf offering sitting out there.

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