Hut 8 Mining (NASDAQ:HUT) is among my top picks in the Bitcoin (BTC-USD) mining industry as it continues to grow its earnings in tough market conditions while maintaining a strong balance sheet.
I like the management’s decision to continue to HODL his bitcoin, saying it “doesn’t make sense to sell low bitcoin just to fund additional bitcoin mining, and we realize the halving isn’t too far off “.
With its first full quarter of generating paid monthly recurring revenue through its 5 data centers, the increase in the number of bitcoins mined and the growth of its exahash to 2.78, the company was able to generate solid revenue in difficult market conditions.
In this article, we’ll take a look at these various elements of the company, along with its latest earnings report, as HUT positions itself for strong growth once the Bitcoin price rebounds sustainably.
Latest Revenue Figures
For the second quarter of 2022, the company generated $43.8 million in revenue, up 31% year-over-year from the $33.5 million in revenue generated in the second quarter of 2021. The bulk of that revenue was generated from Bitcoin mining, with its high-performance computing business adding $4.7 million to the total, in its first full quarter under the company’s control.
As for the amount of Bitcoin mined during the quarter, it stood at a solid 946, a significant increase from the 553 Bitcoin mined in the same period a year ago. Management attributed the increase to an increase in hash rate and increased efficiency from upgrading and expanding the size of its ASIC fleet.
Cost of revenue in the quarter jumped to $47.7 million from $16.6 million in cost a year earlier. Most of this came from increased operating costs and depreciation.
The increase in depreciation is due to the addition of approximately $178 million of new mining equipment and infrastructure over the past year. It also included costs associated with $25 million in capital assets of its newly acquired data center.
Mining operations margins fell from 62% last year in the same period to 38% this year in the second quarter. Most of this was the result of falling Bitcoin prices and an increase in the cost of electricity.
In its high-performance computing business, margins are expected to be between 35 and 40%. Due to some lower-margin products and services in its HPC business, the company withdrew its guidance for revenue growth in the first quarter of 2022. Despite this, management says it expects “profitable revenue growth in 2023” .
Adjusted EBITDA in the quarter was $6.8 million, down from $14.4 million in the first quarter of 2021. I consider these numbers good when considering the economic environment in which the company operates.
The company’s balance sheet remains strong, with a cash balance of $60.1 million at the end of the quarter. In February, it closed a $65 million offering in the market and raised $61 million in the first half of 2022. In August, the company said it had implemented an ATM program where it could sell up to $200 million in common stock. on the Nasdaq.
As of June 30, 2022, the company held 7,406 bitcoins in reserve, worth $188.8 million. Given its balance sheet management, the company said it is able to HODL for the long term and has not sold any Bitcoin since the start of 2021. If the price of Bitcoin does not fall and stays low for a period extended period of time, I think HUT will be able to continue HODL. If the price drops significantly and remains depressed, he will likely have to sell Bitcoin to raise capital. That said, he has options with his ATM program, so he has a good chance of keeping most if not all of his Bitcoin if the price changes direction in late 2022 or early 2023.
The reason I mention this delay is that it will be much clearer what the Fed’s actions will be until 2023.
I’m not saying there won’t be a bounce before then, only that the most likely and longest lasting rise in Bitcoin prices will come either side of the new year.
Finally, by the end of the second quarter of 2022, they had increased the exahash to 2.78, and by the end of the year, they should be at 3.55 exahash.
In August, HUT generated another 375 bitcoins, an average of 12.1 bitcoins per day. The company said its HODL strategy for newly mined Bitcoin remains in place, as the company will deposit 100% of the Bitcoin into custody.
Bitcoin’s overall balance at the end of August stood at 8,111.
Its hash rate went from 2.78 at the end of June to 2.98 at the end of August. At the rate its hash rate is growing, it looks like it will come closer to expectations of 3.55 exahash at the end of 2022.
The company has added an additional 180 NVIDIA GPUs to its Kelowna, BC data center, which currently operates Ethereum (ETH-USD). As “multi-workload machines, the company will be able to use the same machines to provide “artificial intelligence, machine learning, or VFX rendering services to customers.”
High Performance Computing Unit
While the company’s relatively new high-performance computing is attractive and provides needed revenue, in reality it is a very long-term project for HUT that will take time to reach its potential in light of the current situation. goal that the company has for unity. .
Once the unit was integrated into the business, it had to sift through offers to remove or clean up low-margin and/or underperforming products or services. Management said they have completed the process and are ready to expand the HPC infrastructure to attract the type of customers who will benefit from higher margins.
In the long term, the long-term goal of developing its HPC business and “stack work” is to generate enough revenue to finance its mining activity without having to access the capital markets.
The reason this matters is the volatile nature of the Bitcoin price itself. For example, with the fall in the price of Bitcoin, it has been difficult to find debt funding for many miners. By eliminating or reducing reliance on financial markets to raise the necessary capital, it could affordably finance its mining activities without having to rush to obtain capital.
I’m generally wary of businesses that go out of their core business, but in the case of HUT, Bitcoin mining is very simple and unambiguous, and it doesn’t take a lot of extra effort to run this simple business model. For this reason, I don’t think there’s much distraction or interference for building an HPC business which, if successful, could be a great source of income and capital to grow the business over. many years.
While the company has done as well as expected in a very difficult economic environment, while being able to access capital without having to sell Bitcoin in 2022, it still faces the risk of further price deterioration. of Bitcoin.
If Bitcoin approaches the market at or below $12,000 for a sustained period, its business model will be under pressure, just like those of its peers.
I believe that in this scenario, the company will be forced to sell some of its Bitcoin, and possibly a significant amount, depending on how long an extremely low priced Bitcoin environment lasts.
The other uncertainty is whether or not the company will be able to execute its plans for the HPC business. If not, he will have to find other ways to finance the business over the long term. This isn’t an immediate issue, but it could be if the Bitcoin price is under pressure for an extended period of time.
I don’t think either of these scenarios are likely, but they are definitely a possibility. Investors should keep this in mind when considering taking a position on HUT.
That said, HUT and any Bitcoin miner are positioned to endure hardship for quite a long time. It is impossible to quantify the duration because it would depend on the price at which Bitcoin would fall.
I like HUT’s balance sheet first strategy, and I think any bitcoin mining company that doesn’t take a similar stance could face strong growth challenges in the future.
As stated by management, its long-term vision rests on three pillars: Bitcoin mining; maximize its Bitcoin reserves; and focus on growing and expanding its HPC business.
With cash on hand, Bitcoin reserves, and access to capital through its ATM programs, the company has more than enough resources to invest and grow its business over the next year. And that doesn’t include Bitcoin’s rise as a result of continued mining.
If it is able to continue mining Bitcoin at its recent pace, HUT has a good defensive position it can work on to grow its business at a time when many of its competitors are forced to sell Bitcoin to raise capital.
Overall, HUT is one of my four mining companies in which I have positions. Definitely worth a closer look by anyone looking to invest in a speculative game that has an extraordinary upside, especially now that it’s trading at less than $2.00 per share as of this writing. .