Data Center And Tokenization Risks Will Persist Yet Eventually Reward Patience

Catalysts

About Galaxy Digital

Galaxy Digital operates as a diversified financial services firm focused on digital assets, including asset management, trading, venture investing and digital infrastructure such as data centers.

What are the underlying business or industry changes driving this perspective?

• Although Galaxy has secured long term contracts to manage digital asset treasury, the pace of new DAT launches already appears to be slowing. This could limit future asset inflows and fee based revenue growth if existing vehicles do not scale materially.
• Although Helios is expected to begin generating cash flow once build out milestones are met, the heavy capital spending cycle around AI and data centers could see a sharp pullback if some projects prove uneconomic. This would pressure utilization, pricing and Helios related earnings.
• While tokenization and digital custody are gaining attention across traditional finance, Galaxy’s GK8 platform and broader infrastructure efforts are still early. Slower than expected adoption or regulatory clarity around tokenized securities could delay meaningful revenue and margin contributions from this line of business.
• Although management is investing heavily in human capital and attracting large volumes of job applicants, the business depends on recruiting and retaining a relatively small pool of highly skilled specialists. Any shortfall here could limit execution across asset management, infrastructure and risk taking activities, affecting both revenue growth and operating efficiency.
• While integration of crypto with traditional finance appears to be progressing and GalaxyOne has plans to expand outside the U.S., the need to meet stringent regulatory requirements in each new jurisdiction may slow product rollouts and client onboarding. This would cap growth in assets on platform and the associated recurring earnings.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Galaxy Digital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Galaxy Digital's revenue will decrease by 9.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Galaxy Digital will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Galaxy Digital's profit margin will increase from -0.1% to the average CA Capital Markets industry of 25.0% in 3 years.
• If Galaxy Digital's profit margin were to converge on the industry average, you could expect earnings to reach $11.0 billion (and earnings per share of $54.64) by about August 2029, up from -$86.3 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 0.6x on those 2029 earnings, up from -53.2x today. This future PE is lower than the current PE for the CA Capital Markets industry at 38.5x.
• The bearish analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.0%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Helios depends heavily on long term power approvals from ERCOT and on CoreWeave as a single major tenant, so any delay in grid approvals, power constraints or financial stress at CoreWeave could affect utilization of the site and materially change the cash flow that management expects Helios to generate, which would weigh on revenue and earnings.
• The build out around AI and data centers is being described internally as having bubble like characteristics, and if there is a broad pullback in AI infrastructure spending or a washout in less profitable projects, demand for high power data center capacity could soften, putting pressure on pricing, Helios related income and overall margins.
• Tokenization activity is still described as early, with no assets being tokenized at scale yet and key pieces such as regulatory clarity, trading venues and liquidity pools not fully in place, so if regulation or market structure takes longer than expected to develop, infrastructure assets like GK8 and related tokenization services could contribute less fee revenue and delay improvement in profitability.
• Galaxy’s asset management earnings are linked to DAT contracts that were signed early and to a relatively small set of ecosystems, and management already expects the pace of new DAT launches to slow, so if existing DATs fail to attract sizeable assets or if fees compress as competition increases, fee income from this line could be lower than hoped and limit revenue growth.
• The business model relies heavily on human capital, with management emphasizing that the best assets are employees and pointing to intense demand for roles, yet if Galaxy struggles to recruit or retain the specialized talent needed across trading, risk, data centers and infrastructure while the sector becomes more competitive, execution risk could rise and show up as weaker operating efficiency, thinner net margins and more volatile earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Galaxy Digital is $23.5, which represents up to two standard deviations below the consensus price target of $39.66. This valuation is based on what can be assumed as the expectations of Galaxy Digital's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $57.0, and the most bearish reporting a price target of just $23.5.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $43.8 billion, earnings will come to $11.0 billion, and it would be trading on a PE ratio of 0.6x, assuming you use a discount rate of 9.0%.
• Given the current share price of $23.64, the analyst price target of $23.5 is 0.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.