Regulatory Hurdles Will Strain Crypto Mining Though Undervaluation Will Endure

Key Takeaways

• Heavy reliance on blockchain mining makes Intchains Group highly vulnerable to regulatory risks, sustainability pressures, and cryptocurrency market volatility.
  
• Rapid tech cycles and limited sector diversification risk falling behind competitors and threaten long-term earnings stability.
  
• Heavy dependence on volatile crypto assets and mining revenues, combined with limited diversification and stagnant R&D, heightens exposure to both market and regulatory risks.

Catalysts

Engages in the provision of altcoin mining products in the People’s Republic of China.

• While Intchains Group continues to benefit from expanding blockchain and Web3 adoption-bolstered by its deepening integration with leading ecosystem providers and robust product rollout pipeline-a significant risk remains from ongoing regulatory scrutiny of cryptocurrencies and possible restrictions or outright bans in major markets, which could sharply curtail future mining machine demand and thus lead to volatile or declining revenues.
  
• Despite Intchains Group's focus on energy-efficient ASIC chip design for IoT and blockchain applications, the company's core dependence on power-intensive mining solutions makes it vulnerable to tightening global regulations regarding sustainability and energy usage, potentially depressing long-term product demand and weighing on top-line growth.
  
• Although heavy investment in R&D and continuous product innovation could improve its gross and net margins, rapid technology cycles in the semiconductor sector raise the risk that Intchains may not keep pace with larger, better-capitalized competitors, which could erode future profitability if its solutions become obsolete or uncompetitive.
  
• While expanding into new altcoin mining products and planning mass production of state-of-the-art Dogecoin miners might diversify revenue streams, the company's limited sector diversification and high blockchain exposure increase its sensitivity to swings in cryptocurrency prices and mining economics, threatening earnings stability.
  
• Despite maintaining a strong balance sheet and optimizing its ETH accumulation strategy to potentially enhance yield and boost net income, Intchains Group's concentrated customer and geographic exposure leaves it exposed to adverse changes in regional regulatory climates or customer attrition, which could negatively impact both future revenue and earnings visibility.

Intchains Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Intchains Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Intchains Group's revenue will grow by 35.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.5% today to 43.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥334.0 million (and earnings per share of CN¥1.89) by about August 2028, up from CN¥20.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 45.1x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.04%, as per the Simply Wall St company report.

Intchains Group Future Earnings Per Share Growth

Risks

• A substantial portion of Intchains Group's net income in the quarter was driven by unrealized gains in ETH holdings rather than underlying sales, exposing the company to significant downside risk if cryptocurrency prices fall, which could lead to both revenue volatility and declining net income.
  
• The overwhelming reliance on altcoin mining machines as the primary revenue source, and the absence of strategic expansion into high-growth sectors like artificial intelligence chips, creates vulnerability to sharp declines in cryptocurrency sector activity, directly impacting both revenues and margins over time.
  
• Management disclosed that recent revenues were negatively affected by lower sales from mining machines due to volatility in altcoin prices, newly imposed tariffs, and export delays, highlighting the company's sensitivity to both regulatory changes and market conditions that could suppress future revenues and earnings.
  
• The company's ETH accumulation and yield-generating strategy ties a major portion of its balance sheet to both the performance and regulatory outlook of Ethereum and broader crypto markets, making financial results highly susceptible to industry-wide crackdowns or adverse macro trends, thus threatening earnings stability.
  
• While R&D spending is described as robust, the fact that the company does not anticipate increasing R&D expenditure in the near term may limit its capacity to keep pace with faster-moving or larger competitors, which could erode technological leadership and compress future gross margins.

Valuation

• The assumed bearish price target for Intchains Group is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Intchains Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥772.5 million, earnings will come to CN¥334.0 million, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of $2.1, the bearish analyst price target of $4.0 is 47.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.