2023-12-12 07:30:00 ET
Summary
- TeraWulf, a small-cap Bitcoin miner, has experienced significant volatility in its stock price, with a massive rally followed by a 22% drop on Monday.
- WULF stock is currently at a decision point, with a key resistance level at $1.85 and support at $1.40. The stock's momentum is stretched, and the accumulation/distribution line indicates more selling than buying.
- TeraWulf's correlation to Bitcoin is weak, but a potential short squeeze could occur if the stock clears $1.85.
- Speculative buy rating based upon Bitcoin remaining elevated.
The most recent rally in altcoin OG Bitcoin (BTC-USD) has led to some truly eye-popping moves in the companies that mine cryptos. This group is volatile , so big moves aren't out of the ordinary, but we've seen a period in the past six months where many miners were cut in half or worse, only to put in triple-digit rallies in the past few weeks in some cases. For that reason alone, this group isn't for everyone and that's fine; there are thousands of stocks you can buy that aren't Bitcoin miners. But if you're still here, you may be interested in the action of small cap miner TeraWulf (WULF).
TeraWulf is a relatively new player in a relatively new industry, and its market cap is under $350M after Monday's 22% swoon. As we'll see, it's also heavily laden with debt, and issues common shares like it's 1999. With all of this in mind, I'm torn on TeraWulf because it does legitimately have massive upside potential under the right circumstances, but it also has an unsustainable capital structure. Let's dig in.
TeraWulf stock at a decision point
TeraWulf's chart shows the immense moves it makes on a regular occasion, and in both directions. I'll say again that this stock moves a lot and if that's not your thing, this is not for you. The rally we've seen in the past few weeks blew through one very important resistance level, but was swiftly rejected at the next.
I'll call out the range of consolidation in the middle of the chart between roughly $1.40 and $1.85. that was a zone of consolidation from April to June, and a lot of trading took place there. The fact that the stock was able to push through the bottom end is unequivocally bullish. The problem is now that the stock fell 22% on Monday, it's right at the bottom of the range again. If the stock fails that, it's possible the bulls defend the 50-day simple moving average, but for me, $1.40 is the level. Below that, I'm not interested in a long.
The stock is already double what it was at the beginning of November, so momentum is stretched. The PPO is in positive territory, but if we look at the last panel, the accumulation/distribution line is literally one of the worst I've seen. That simply means that during the trading day, there is a heck of a lot more selling than buying. It's being distributed in big amounts and regularly, which makes me think this rally is lacking staying power.
When I look at Bitcoin miners I like to show their correlation to Bitcoin itself, because it gives us clues as to future direction of the miner. However, TeraWulf - rather strangely - really doesn't have much correlation to Bitcoin.
This is a 100-day correlation, and you can see right now, it's actually negative . It fluctuates a lot over time, and in general just isn't useful.
Now, TeraWulf's current short interest is 23%, which is quite high. That's not helping with volatility, but I will say that if the stock can clear $1.85 on a closing basis, we just may see some panic buying associated with the high number of shorts. I am NOT suggesting anyone go buy this for a potential short squeeze, because true short squeezes almost never happen. But it's a possibility.
Overall, the level here is $1.40, and if I had to guess, I think it is more likely than not to fail short-term. Longer-term, much depends upon Bitcoin pricing, as we'll see now.
Jekyll and Hyde fundamentals
TeraWulf does have immense growth potential if it can execute. As with any company with potential, the execution part is where things can fall apart, but if TeraWulf can do what's in the chart below, it could be a lot bigger.
The company was at basically zero in the second quarter of last year, and is set to be at ~8 EH/s in the near future. There's more scale available, and given the massive rise in the price of Bitcoin, I'm guessing the company is looking at how to get the optional buildout done. At any rate, TeraWulf has put in a massive expansion at just the right time as Bitcoin is flying.
Now, Bitcoin mining is a game that relies on minimizes operating costs and hoping that the price of Bitcoin goes higher. It's not unlike farming or mining metal out of the ground in those respects. That offers the advantage of massive operating leverage when prices are high, but operating leverage works in both directions.
TeraWulf's 2024 estimated marginal cost to mine one Bitcoin is ~$23.6k. That means that if Bitcoin is at $25k, TeraWulf gets ~$1.4k in theoretical profit per coin. However, Bitcoin rising to $30k means $6.4k in profit, or 4.5X as much. That's how operating leverage can pull TeraWulf's profits into the green going forward, as we can see below.
Bitcoin is at $41.5k as I write this, so we'd be looking at $164M+ in EBITDA in the first quarter of 2024, and $147M+ in FCF based on the data above. There are a lot of assumptions in these numbers, not least of which is the company's ability to get $40k for each Bitcoin, but if that does come to fruition, the stock is extremely cheap at its current $345M market cap.
TeraWulf is still making losses, and currently is expected to continue losing money next year.
Revenue is set to rise more 300% this year, another 56% next year, and a further 51% in 2025. I can see those as being reasonable given the buildout of the company's mining sites. The massive, critically important wildcard that TeraWulf cannot do anything about is the pricing of Bitcoin.
Other considerations
I mentioned TeraWulf's capital structure at the beginning and here's what I'm on about.
The company has $119 million in net debt, and it's paying $10 million quarterly in interest expense. If we annualize that to $40 million in interest expense, and compare it to the company's $66 million in revenue, well, you know. I've never seen a company so laden in debt except for maybe an early-stage pharma startup. That's not a compliment.
So how is TeraWulf funding its operations?
The share count has ballooned in the recent past, to the tune of 59 million shares to 238 million shares in the past 2.5 years. Unless and until cash generation improves - which it might in 2024 - this is likely to continue being a huge headwind for shareholders.
Let's finally turn our attention to the price-to-sales ratio, and on this front, we have a mixed bag.
Shares are at 4.6X forward sales right now, but keep in mind the company's top line is growing rapidly. It is, however, quite expensive compared to the past couple of years. In fact, it's more than double the average valuation. Even at $1.42, then, I can't say the stock is all that cheap at the moment.
If we put all of this together, I see TeraWulf as an extremely high-risk way to gain exposure to Bitcoin. If Bitcoin remains above $40k well into 2024 (or higher), TeraWulf is very likely to make massive gains in its share price from here. However, its balance sheet is being held together with hopes and dreams so if Bitcoin doesn't maintain its gains, there's a great chance TeraWulf will go much, much lower than the current $1.42 per share.
That, then, is the question; do you think Bitcoin is going higher? If you do, TeraWulf is a possible long. I happen to be very bullish on Bitcoin (as I have been for a few months now), and I think it's going to do well in 2024. With that in mind, I'm putting a speculative, high-risk buy on TeraWulf. This is not for everyone, but there's potential here based upon the economics that $40k+ Bitcoin provides to TeraWulf, so the bull case hinges upon that.
For further details see:
TeraWulf Stock: Starting With A Buy, But There's A Catch