Diversifying With HPC Data Centers Promises To Power Growth And Stabilize Earnings

Key Takeaways

• Diversification into HPC data centers and strategic site acquisitions position Cipher Mining to capitalize on AI-driven demand and enhance revenue stability.
  
• Low electricity costs and increased self-mining capacity are expected to boost Bitcoin mining profitability and improve net margins.
  
• Transition risks and financial pressures from significant losses and revenue decline could impact Cipher Mining's execution, requiring careful management of contracts and capital investments.

Catalysts

Engages in the development and operation of industrial scale bitcoin mining data centers in the United States.

• The strategic shift from solely Bitcoin mining to developing HPC data centers allows Cipher Mining to diversify and potentially increase revenue through long-term leases with high-quality tenants in the HPC space. This diversification could enhance future revenue stability and growth.
  
• The successful acquisition of multiple greenfield data center development sites, particularly in Texas, positions Cipher to capitalize on the rising demand for large-scale data centers driven by AI and other high-performance computing needs, potentially boosting revenue through increased leasing opportunities.
  
• Expected growth in self-mining capacity from current levels to 13.5 exahash per second by the end of the year, coupled with competitive low electricity costs of $0.027 per kilowatt-hour, can improve net margins by reducing operating costs and increasing Bitcoin mining profitability.
  
• Potential long-term leases with hyperscalers, enabled by strategic locations like Barber Lake and Black Pearl, could drive substantial returns and significantly enhance revenue streams, as these agreements often result in stable and predictable income.
  
• Benefitting from an experienced team with a background in hyperscaler data center construction, Cipher Mining is well-positioned to efficiently execute its development projects, potentially increasing operational efficiencies and reducing costs, which would positively impact earnings.

Cipher Mining Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cipher Mining's revenue will grow by 68.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -33.8% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $39.7 million (and earnings per share of $-0.11) by about November 2027, up from $-51.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $164.4 million in earnings, and the most bearish expecting $-108.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 212.9x on those 2027 earnings, up from -45.1x today. This future PE is greater than the current PE for the US Software industry at 41.0x.
• Analysts expect the number of shares outstanding to grow by 35.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Cipher Mining Future Earnings Per Share Growth

Risks

• The evolution from Bitcoin mining to HPC data centers presents execution risk, as these are vastly different markets. This could impact revenue if the transition does not go as planned.
  
• The reliance on fixed price power agreements could become a vulnerability if these contracts are not maintained or favorable prices cannot be secured in future agreements, potentially impacting net margins.
  
• With a significant GAAP net loss of $87 million in the third quarter and a revenue decline of 35% sequentially, financial performance may continue to be under pressure, impacting earnings and the company's balance sheet strength.
  
• The uncertainty surrounding the approval process for new interconnections at development sites like the 3Ms (Mikeska, Milsing, and McLennan) adds risk, potentially delaying revenue generation and increasing upfront costs.
  
• The significant upfront capital investments needed for future site development, combined with the potential for delays in securing high-quality HPC tenants, could strain financial resources and impact future earnings.

Valuation

• The analysts have a consensus price target of $8.04 for Cipher Mining based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $735.2 million, earnings will come to $39.7 million, and it would be trading on a PE ratio of 212.9x, assuming you use a discount rate of 6.9%.
• Given the current share price of $6.68, the analyst's price target of $8.04 is 16.9% 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.