Bitcoin Mining Integration And LuxOS Upgrade Will Drive Efficiency

Key Takeaways

• Transitioning to a vertically integrated model is expected to reduce energy costs and improve operational efficiency, positively impacting net margins and earnings.
  
• Plans for infrastructure expansion and investment in energy efficiency initiatives may enhance mining capacity and profitability, supporting future revenue growth and earnings.
  
• Heavy reliance on Bitcoin and lack of diversification increase financial risk and expose LM Funding America to market volatility and liquidity challenges.

Catalysts

Operates as a cryptocurrency mining and specialty finance company.

• The transition to a vertically integrated model for managing their own mining infrastructure is expected to reduce energy costs and improve operational efficiency, which should positively impact net margins and earnings.
  
• Plans to expand their infrastructure, including the acquisition of greenfield and brownfield power assets, may lead to increased mining capacity and future revenue growth.
  
• Implementing Luxor Technology Corporation's LuxOS firmware is anticipated to enhance mining efficiency by 10% to 15%, potentially improving net margins and earnings without additional capital expenditure.
  
• Retaining a portion of mined Bitcoin allows them to capture potential value increases, impacting future earnings and strengthening the balance sheet, which can be appealing to investors considering their undervaluation relative to Bitcoin holdings.
  
• Plans to invest in next-generation mining hardware and energy efficiency initiatives are expected to lower costs and improve profitability, which could boost net margins and earnings over time.

LM Funding America Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LM Funding America's revenue will grow by 1.5% annually over the next 3 years.
• Analysts are not forecasting that LM Funding America will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate LM Funding America's profit margin will increase from -133.7% to the average US Software industry of 12.0% in 3 years.
• If LM Funding America's profit margin were to converge on the industry average, you could expect earnings to reach $1.3 million (and earnings per share of $0.22) by about May 2028, up from $-14.1 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 27.2x on those 2028 earnings, up from -0.6x today. This future PE is lower than the current PE for the US Software industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.18%, as per the Simply Wall St company report.

LM Funding America Future Earnings Per Share Growth

Risks

• The market cap of LM Funding America is significantly below the value of their Bitcoin holdings, which could indicate investor concerns about the company's ability to generate future revenue or profit outside of their Bitcoin assets, impacting overall financial stability.
  
• Revenue decreased year-over-year for the fourth quarter of 2024 due to the Bitcoin halving event and relocation of mining machines, highlighting the company's vulnerability to Bitcoin market fluctuations, which directly affects their revenue streams.
  
• The company is relying heavily on Bitcoin-backed debt and market conditions for financing, which introduces risks if Bitcoin prices do not increase as anticipated, potentially impacting liquidity and financial resilience.
  
• Operational efficiency improvements and new hardware installations are pending, but delays or increased costs in these processes could strain net margins and earnings.
  
• Expansion and acquisition strategies are centered around Bitcoin mining with no diversification into other sectors like AI, limiting growth potential and leaving earnings highly exposed to Bitcoin price volatility.

Valuation

• The analysts have a consensus price target of $4.5 for LM Funding America based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.0 million, earnings will come to $1.3 million, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 10.2%.
• Given the current share price of $1.53, the analyst price target of $4.5 is 66.0% 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.