Mining And HPC Ventures Propel Growth, Yet Volatility And High CapEx Lurk

Key Takeaways

• Expansion and upgrade of mining infrastructure aim at significantly boosting self-mining capacity, thus enhancing revenue and operational efficiency.
  
• Diversification into High-Performance Computing (HPC) and achieving competitive power pricing demonstrate strategic growth and cost leadership, boosting overall valuation.
  
• Diversified focus and high capital expenditures pose risks to profitability amidst market volatility, competition, and regulatory uncertainties.

Catalysts

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

• Expansion plans, such as the significant upgrade of mining rigs at the Odessa data center to improve efficiency and capacity, will directly boost self-mining capacity to 13.5 exahash per second by year-end, positively impacting revenue and net margins by lowering power costs per bitcoin mined.
  
• The development of the new 300-megawatt Black Pearl data center aimed to further expand self-mining capacity to 35 exahash per second by 2025, enhancing the company's competitive position and likely contributing to revenue growth and margin expansion through increased bitcoin production.
  
• Building and operating its own infrastructure, including acquiring sites with potential for 500 megawatt capacity each, provides Cipher Mining with a strategic advantage over competitors and a clear path to scaling operations. This vertical integration strategy can significantly reduce operational risks, secure long-term growth, and positively influence earnings through cost management.
  
• Launching a High-Performance Computing (HPC) infrastructure business diversifies Cipher Mining's revenue streams and can potentially lead to new earnings drivers outside of bitcoin mining. This strategic move could open up new markets and customer segments, enhancing overall company valuation.
  
• Achieving a competitive all-in weighted average power price of $0.027 per kilowatt hour underscores the company's operational efficiency and cost leadership in the mining industry. This advantage is crucial for maintaining high net margins in a highly competitive and variable market, directly contributing to the company's potential undervaluation.

Assumptions

• Analysts are assuming Cipher Mining's revenue will grow by 61.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $108.3 million (and earnings per share of $0.1) by about October 2027, up from $16.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $176.4 million in earnings, and the most bearish expecting $4.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 89.1x on those 2027 earnings, up from 88.6x today. This future PE is greater than the current PE for the US Software industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 47.28% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Risks

• There's a potential risk related to the high capital expenditures required for the expansion and upgrade of mining rigs and the construction of new data centers, which could impact the company's cash flow and net margins if the expected returns on these investments do not materialize as planned.
  
• The company's significant focus on building infrastructure for HPC (High-Performance Computing) services alongside Bitcoin mining could dilute its capital and operational focus, potentially affecting its core mining operations' profitability and net margins if HPC revenues do not offset the associated costs.
  
• Reliance on the fluctuating value of Bitcoin as part of the company's revenue stream introduces volatility, which could affect earnings negatively if there's a significant downturn in the cryptocurrency market.
  
• The competitive landscape in both Bitcoin mining and HPC infrastructure is intensifying, which may pressure Cipher Mining's ability to secure high-value contracts and maintain its cost leadership, potentially impacting revenues and earnings.
  
• Regulatory risks associated with both the cryptocurrency industry and the energy sector in the jurisdictions where Cipher operates could introduce unforeseen challenges, potentially affecting operational costs and compliance expenses, thus impacting net margins.

Valuation

• The analysts have a consensus price target of $7.42 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 $9.0, 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 $668.7 million, earnings will come to $108.3 million, and it would be trading on a PE ratio of 89.1x, assuming you use a discount rate of 6.7%.
• Given the current share price of $4.38, the analyst's price target of $7.42 is 40.9% 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.