20 Jul 2022

Fire sale or value trap? Looking at the valuations of bitcoin mining stocks

The bitcoin bear market has pushed mining stock valuations to rock bottom. Buying stocks at such low valuations has historically been a good strategy. This article analyzes which mining stocks are the most undervalued.
public miners - ev ebitda.svg
Source: Yahoo Finance, monthly production updates, Q2 2022 reports
I recently published a blog post analyzing the quality of bitcoin mining companies, where Argo and Riot came out as winners. This blog post complements my first blog post by analyzing the valuation of bitcoin mining companies.How do you value a bitcoin mining company? As with all companies, ideally, you should apply a discounted cash flow analysis, but this is beyond the scope of this blog post. In this blog post, I will compare eight public bitcoin mining companies' valuations looking first at their assets and then their income statement.
Which bitcoin mining stock is the lowest valued based on assets?
The business model of bitcoin mining is purchasing ASICs and running them to generate bitcoin. Most bitcoin miners are vertically integrated, meaning they also own data centers. Still, the majority of a miner's balance sheet consists of ASICs. As an ASIC owner and operator, a bitcoin mining company should theoretically be valued a bit higher than the total market value of its ASICs.Therefore, a bitcoin miner's most helpful asset valuation metric is EV / Operating ASIC Value, coined by Balmy Investor. Here, we divide the Enterprise Value (equity + debt - cash) by the market value of the miner's current plugged-in hashrate. You can read more about this metric here.
public miners - ev operating asic value
Source: Yahoo Finance, monthly production updates, Q2 2022 reports, Hashrate Index
We see that CleanSpark has the lowest EV / Operating ASIC Value, with their enterprise value of $212 million being only 1.9 times higher than the market value of their plugged-in hashrate of 2.8 EH/s. In practice, this means that you pay 1.9 times more for an ASIC by purchasing CleanSpark stock than you would by buying the ASIC directly. Most other miners have EV / Operating ASIC Values in the 3 to 5 area, but Marathon is an outlier with 11.9. Marathon's high EV / Operating ASIC Value is caused by its enterprise value of $1.8 billion, which is almost nine times higher than CleanSpark.EV / Operating ASIC Value is a good metric, but it ignores the value of the future contracted hashrate yet to be delivered and plugged in. My thesis is that bitcoin mining investors should focus more on plugged-in hashrate than future hashrate, but it's still important to realize that future hashrate also has a value on a company's balance sheet.Therefore, our next asset valuation metric is EV / Contracted ASIC Value. It considers the future contracted ASIC value but discounts the value of future ASIC deliveries to account for the alternative cost of not producing bitcoin.
public miners - ev contracted asic value
Source: Yahoo Finance, monthly production updates, Q2 2022 reports, Hashrate Index
Considering future deliveries of ASICs, we see that CleanSpark also has the lowest valuation, with an EV / Contracted ASIC Value of 0.6. Most other mining companies also score relatively well on this metric. Still, it's essential to be aware that the market value of ASICs is plummeting and may, in reality, be lower than the value I have used from Hashrate Index. Therefore, EV / Contracted ASIC Value and EV / Operating ASIC Value may be understated here.Core Scientific is the highest valued, with an EV / Contracted ASIC Value of 3.7, while Marathon is the second-highest valued with 2.3. An important caveat is that Marathon has almost 20 EH/s to plug in before early 2023, while Core Scientific only has around 5 EH/s awaiting delivery. I doubt Marathon will be able to plug in all their future delivered ASICs, but I have no doubts that Core Scientific will be able to. Therefore, I consider Marathon more overvalued than Core Scientific based on the contracted ASIC value.Asset valuation winners: CleanSpark and StrongholdAsset valuation losers: Marathon and Core Scientific
Which bitcoin mining stock is the lowest valued based on income?
Now it's time to examine the mining companies' valuations relative to their income. My favorite income valuation metric is EV / EBITDA. Here, we again use the Enterprise Value (EV) and divide it by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). I have not used EBITDA from their latest financial reports (Q2 2022) but estimated it based on their current bitcoin production and production costs. I have not accounted for future bitcoin production growth in my EBITDA estimate.While the balance sheet valuation metrics I used are specific to the bitcoin mining industry, EV / EBITDA can be used on any company from any industry. Generally, an EV / EBITDA below ten is considered healthy.
public miners - ev ebitda
Source: Yahoo Finance, monthly production updates, Q2 2022 reports
Stronghold has the lowest EV / EBITDA with 2.3. The company is struggling under a mountain of debt and is therefore understandably valued much lower than its competitors.In the second place, we yet again find CleanSpark, with an EV / EBITDA of only 2.9. While Stronghold has a fragile balance sheet, CleanSpark has almost no debt and has even been able to capitalize on the bear market by making purchase orders for machines at very low prices.In the same way that CleanSpark has consistently been among the lowest valued miners in this analysis, Marathon once again is the highest valued miner based on income with an EV / EBITDA of 17.2. Marathon's stock is priced based on future hashrate additions and future income. If the company can reach its goal of 23.3 EH/s by early 23.3, its revenue will increase, and its EV / EBITDA may be justifiable. But if they don't reach this goal, which I don't think they will, their stock is severely overvalued compared to their peers.Income valuation winners: Stronghold and CleanSparkIncome valuation losers: Marathon and Core Scientific
Most of the public mining companies have very low valuations at the moment, which should make them interesting for value investors. Historically, purchasing stocks at such valuations has given excellent returns, and now might be a great opportunity for bullish investors to buy shares in bitcoin mining stocks.While most bitcoin mining stocks are undervalued, the most undervalued is undoubtedly CleanSpark, as they are the lowest valued based on their balance sheet and income. CleanSpark also scored relatively high on my quality analysis a couple of weeks ago. This combination of quality and low valuation makes CleanSpark one of the most interesting bitcoin mining stocks going forward.Not all mining stocks are undervalued. Just like Marathon was the loser of my quality analysis as the company is struggling operationally, its stock also comes with the highest valuation, measured by the balance sheet and the income.Valuation winner: CleanSparkValuation loser: Marathon
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