2024-01-15 07:00:00 ET
Summary
- The SEC's approval of spot bitcoin exchange-traded product shares is expected to boost the crypto industry and increase demand for Bitcoin.
- CleanSpark, a Bitcoin miner, is likely to benefit from the SEC's decision and the potential increase in Bitcoin prices.
- Investors should consider CleanSpark's fundamentals and the upcoming Bitcoin halving when evaluating the company's potential for long-term success.
The crypto world has just changed and changed in a way that boosts the industry for investors, companies, and exchange-traded fund packagers.
Will this change benefit CleanSpark, Inc. (CLSK), the Bitcoin miner? Yes, it likely will, but potential investors also should consider the firm's fundamentals and the soon-to-arrive Bitcoin halving.
The catalyst
On Wednesday, January 10, 2024, the U.S. Securities and Exchange Commission, the SEC, announced in a press release that it had approved the "listing and trading of a number of spot bitcoin exchange-traded product [ETP] shares."
Between 2018 and March 2023, the SEC disapproved more than 20 applications for spot bitcoin ETPs. One of those applicants, Grayscale Bitcoin Trust, appealed to the U.S. Court of Appeals in the District of Columbia - and won. In response, SEC chair Gary Gensler wrote on Wednesday, "Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares."
This ruling is one that Bitcoin companies hoped for and looked forward to because they believe it opens the doors to significant new demand for Bitcoin, which should push up prices and more.
CleanSpark CEO Zach Bradford said in an interview the same day, "There's a lot of institutional capital that's been sidelined due to the risks around it. And the ETFs have now put up a system where they're going to hold it, they're going to manage some of those immediate risks around holding and custody of the bitcoin themselves."
Bradford added that many portfolio managers will want "at least a small portion" of their funds in bitcoin because they're worried they might miss out.
It's a boost the Bitcoin industry needs as it approaches another halving, which is expected in April or May of this year. Investopedia defines halving in this way, "After the network mines 210,000 blocks - roughly every four years - the block reward given to Bitcoin miners for processing transactions is cut in half. This event is called halving because it cuts the rate at which new bitcoins are released into circulation in half."
For Bitcoin miners like CleanSpark, this can be a challenge. However, as Bradford pointed out, each time there is a halving, there's also an opportunity for efficient miners,
On a historical basis, in the prior halvings when it occurs, there's usually an upward price movement 3 to 6 months after the halving event that's very meaningful. And so as a miner, our focus has been on making sure we are amongst the most efficient miners on an energy basis, which of course, is our main cost driver, so we can stay competitive so that when the large price movement that we do expect on a post-halving basis occurs that we're ready to benefit from that. So that's what I would-- new investors to Bitcoin, there's a catalyst coming in April to look for that historically has led to price improvements on a long-term basis."
Obviously, the decision is good news for CleanSpark; it also excited investors, but only briefly, as shown in this five-day chart:
I expect the firm will benefit from this decision in the longer run, but investors will also want to see progress on its fundamentals, particularly its net income and earnings.
Fundamentals
Over the past five years, CleanSpark has grown its top line more than 10-fold:
Revenue began increasing rapidly after the company changed its business model from alternative energy to Bitcoin mining in 2020.
However, its net income and earnings per share continue to disappoint:
A scan through the income statements for fiscal 2023 and 2022 shows that costs continue to outpace revenue:
Revenue rose by $36.83 million, while costs and expenses were up $130.0 million, leaving it with a loss for the year of $131.04 million. Note how many lines in the income statement are significantly higher in fiscal 2023 than in fiscal 2022.
There is a good reason for higher depreciation and amortization. Chief Financial Officer Gary Vecchiarelli explained in the year-end press release that the increased depreciation was a result of the company upgrading its fleet. As a result of the upgrade, it replaced older and less efficient miners (specialized computers) with faster machines.
The CFO also explained that "Our revenues increased by approximately $37 million, or 28% primarily driven by our growing bitcoin production, which increased 84% over the prior year. However, bitcoin price saw much volatility during the year affecting our revenues and margins accordingly."
Apparently, the upgrade is delivering results already. CEO Bradford noted in the release, "Operationally, our hashrate growth year-over-year has been exceptional, highlighting our commitment to not just growing but also scaling efficiently. We achieved a remarkable milestone this year by surpassing a total hashrate of 10 exahashes per second, and that hashrate is among the most efficient in the industry."
In an earlier article on CleanSpark, I expressed concern about the cost of payroll, which includes executive compensation. For fiscal 2023, payroll went up to $45.7 million from $40.9 million in fiscal 2022. For 2023, that included $24.1 million in stock-based compensation.
Again, that seems rich for a company that hasn't delivered many profitable quarters. It also contributes to dilution; the 'weighted average common shares outstanding - basic' rose from 55.7 million in fiscal 2022 to 160.2 million in fiscal 2023.
There was an improvement in the costs of its discontinued lines of business, which fell from $17.2 million in fiscal 2022 to $4.4 million in fiscal 2923.
The earnings estimates posted on Seeking Alpha suggest the company will make progress in the coming years (for fiscal 2023, the company reported a loss of $1.33 per share):
- 2024: a loss of $0.89 per share
- 2025: a loss of $0.22 per share
- 2026: a loss of $0.06 per share
Assuming the trend continues, that would suggest the company will become profitable in 2027.
Valuation
Surprisingly, the Seeking Alpha system gives CleanSpark a valuation grade of B: Of the four ratios available, EV/Sales and Price/Sales (both TTM and FWD) get Ds and EV/EBITDA receives a C+, while the only good grade is Price/Book TTM because it receives a B-minus.
It cannot compute standard metrics such as price-to-earnings and price/earnings-to-growth because earnings are negative.
Lacking conventional metrics, we turn to the headwinds and tailwinds that could affect CleanSpark's share price.
Judging by this chart of Bitcoin prices from CoinMarketCap , it's possible the crypto-currency could hit a peak again in the not-too-distant future:
Also in the near future, expect the next halving, which could have mixed results for the industry and CleanSpark. The price per unit obviously will go down, but as CEO Bradford noted, that could also have a beneficial effect on the price.
The company's decision to switch its business model was a good one, and according to the full-year press release, fiscal 2023 saw it not only meet but exceed many of its strategic aims.
That's reflected in its December hashrate of just over 10 EH/s and its financial position. It has bought 60,000 new Bitmain S21 units, which it expects to arrive between April and June; it also has an option of 100,000 more machines at a fixed price.
At year's end, on September 30, it had $170 million in liquidity, including $29 million in cash and $56 million in unsold Bitcoins.
Although I've been critical of its costs, I also recognize that many will become less significant as revenue grows. That may be one of the drivers of improved EPS estimates over the next couple of years.
Taking these headwinds and tailwinds into account, I remain bullish and consider today's price fair in light of where it should go in the next couple of years. At the same time, I'm reiterating my Buy recommendation.
Other ratings
Wall Street analysts are the most bullish on CleanSpark; of the six analysts who have weighed in over the past 90 days, four have issued Strong Buys, one has issued a Buy, and one a Hold.
With my Buy rating, SeekingAlpha analysts will have posted one Strong Buy and three Buys in the past 90 days.
The Quant rating is the least bullish, with a Hold.
Conclusion
Although the SEC decision to allow the creation of Bitcoin ETFs gave CleanSpark a brief spell of higher prices, I think its significance will be greater in the longer term. It allows many institutional and retail investors to add at least some Bitcoin to their portfolios in the next couple of years, thus increasing demand. That demand should help offset the coming halving.
For the company specifically, its fundamentals are headed in the right direction as it not only prepares for the halving but for becoming or staying a market leader for the next five to ten years.
For further details see:
CleanSpark To Benefit From SEC Decision - But Not Necessarily Right Now