Expanding Into AI Datacenters Will Tap New Markets While Bitcoin Mining Volatility Threatens Profitability

Key Takeaways

• Expansion in AI datacenter capacity and GPU-as-a-Service is expected to drive significant future revenue growth and fulfill emerging market needs.
  
• Strategic upgrades and power management are projected to enhance fleet efficiency, reduce costs, and improve profitability in self-mining.
  
• Reliance on volatile Bitcoin mining, high capital demands, and fluctuating energy costs threaten profitability and liquidity amid uncertain cryptocurrency and AI market dynamics.

Catalysts

Operates as a vertically integrated operator of energy infrastructure and Bitcoin miners in North America.

• Hut 8's strategic focus on expanding its AI datacenter capacity through power-first initiatives aims to capitalize on the growing demand from AI hyperscalers, potentially driving significant future revenue growth.
  
• The launch of the GPU-as-a-Service business is expected to generate substantial annualized revenue, positively impacting top-line growth by fulfilling emerging market needs in the AI and high-performance computing sectors.
  
• The Vega project is set to energize in the first half of 2025, potentially generating approximately $135 million in annualized revenue, which will significantly enhance Hut 8’s revenue streams.
  
• The planned upgrade of ASIC miners, which is expected to increase the self-mining hash rate by 66% and improve fleet efficiency significantly, could drive substantial gross margin expansion in the self-mining segment, positively impacting net earnings.
  
• Hut 8's disciplined approach to power cost management has led to a significant reduction in energy costs, which is expected to enhance future net margins by optimizing operational expenditure and increasing profitability.

Hut 8 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hut 8's revenue will grow by 39.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 98.0% today to 39.9% in 3 years time.
• Analysts expect earnings to reach $211.7 million (and earnings per share of $2.11) by about December 2027, up from $190.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $284 million in earnings, and the most bearish expecting $43.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2027 earnings, up from 14.6x today. This future PE is lower than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to grow by 2.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Hut 8 Future Earnings Per Share Growth

Risks

• The reliance on Bitcoin mining, affected by network difficulty and the Bitcoin halving, presents high revenue volatility and challenges in maintaining consistent income streams. Additionally, declining hash prices could impact operating margins in the self-mining segment.
  
• The significant capital expenditure required for developing AI Tier 3 data centers and the Vega project could strain financial resources and lead to liquidity challenges if projected revenues do not materialize as expected.
  
• Heavy dependence on securing low-cost energy and the fluctuating nature of energy prices could impact profitability, as the business model relies on consistently accessing affordable power to realize cost savings and competitive margins.
  
• The competitive and rapidly evolving nature of the ASIC and GPU compute markets introduces volatility in demand and prices, which could impact earnings and overall financial performance if the company fails to hedge effectively or secure favorable contracts.
  
• The extensive capital allocation for new technological ventures into high-density computing infrastructure might not yield the anticipated returns if the demand for AI computing or new cryptocurrency technologies evolves differently than forecasted, affecting future revenue growth.

Valuation

• The analysts have a consensus price target of $33.62 for Hut 8 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 $38.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $530.0 million, earnings will come to $211.7 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of $29.62, the analyst's price target of $33.62 is 11.9% 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.