Owning Data Centers And Power Assets Will Cut Hosting Costs

Key Takeaways

• Transition to owning data center assets and low-cost power facilities aims to enhance operational efficiency and lower Bitcoin mining costs, boosting profitability.
  
• Expansion in power capacity and adjacent services should diversify revenue streams and strengthen growth through increased self-mining, hosting, and cloud platform engagement.
  
• BitFuFu's revenue faces risks from Bitcoin price fluctuations, rising blockchain difficulty, and operational challenges, while competition and geographic risks further threaten profitability.

Catalysts

Engages in the provision of digital asset mining solutions in Singapore, North America, Asia, and Europe.

• BitFuFu has transitioned from an asset-light model to owning data center assets, which is expected to improve operational efficiency and reduce hosting costs significantly, potentially increasing net margins and profitability.
  
• The acquisition of low-cost power facilities in regions such as Ethiopia and Oklahoma is set to lower electricity costs, which should positively impact earnings and net margins by reducing the overall cost of Bitcoin mining operations.
  
• BitFuFu plans to expand its secured power capacity to 1 gigawatt over the next two years, which will likely boost self-mining and hosting operations, potentially increasing total revenue.
  
• The continued growth of BitFuFu's cloud mining platform, driven by increased user engagement and customer acquisition initiatives, is likely to contribute significantly to future revenue growth.
  
• Expansion into adjacent services, including the sale of mining machines and advanced software solutions, should diversify revenue streams and create synergy with existing operations, enhancing overall revenue and earnings.

BitFuFu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BitFuFu's revenue will grow by 22.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.6% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $75.8 million (and earnings per share of $0.74) by about April 2028, up from $54.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.8x on those 2028 earnings, up from 11.2x today. This future PE is lower than the current PE for the US Software industry at 31.7x.
• Analysts expect the number of shares outstanding to grow by 5.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

BitFuFu Future Earnings Per Share Growth

Risks

• The heavy reliance on Bitcoin price dynamics poses a significant risk to BitFuFu's revenue and profitability, as fluctuations in Bitcoin prices directly affect mining profitability and the company's asset valuation.
  
• Increasing blockchain difficulty and the effects of Bitcoin halving events result in reduced Bitcoin production and higher operational costs, potentially impacting the company's net margins and overall financial health.
  
• The company's transition to owning data center assets entails upfront capital expenditure and operational risks, which could pressure cash flow and earnings if not managed efficiently.
  
• Exposure to geographic risks, especially with major data center operations and acquisitions in Ethiopia, involves political and regulatory uncertainties that could affect hosting costs and, subsequently, net margins.
  
• The rise in competition within the Bitcoin mining sector, combined with operational downtime during strategic relocations, could hinder BitFuFu's ability to maintain its revenue growth and market position.

Valuation

• The analysts have a consensus price target of $8.635 for BitFuFu 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 $10.27, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $855.4 million, earnings will come to $75.8 million, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $3.7, the analyst price target of $8.64 is 57.2% 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.