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Even though economic challenges have grabbed the financial headlines, companies like Hut 8 Mining (NASDAQ:HUT) have been quietly boosting their Bitcoin (BTC-USD) holdings as the price of Bitcoin remains under pressure.
As of May 31, HUT said it held 7,078 Bitcoin in reserve, making it among the market leaders in that category. After Riot Blockchain (RIOT) sold off some of its Bitcoin over the last several months, bringing its total on its balance sheet to 6,536, HUT has moved up a notch on the leader board.
In this article, I want to explore why HUT is in good shape, and why is positioned strongly to emerge out of the Bitcoin correction ready for the next growth spurt.
Latest numbers
Before getting into the numbers for Q1, it needs to be understood that they are going to be much better than the current quarter, and most likely Q3 as well. It of course depends upon how the price of Bitcoin responds to economic fears going forward. At this time the key metric influencing the market is the inflation rate and how the Federal Reserve will respond to it.
HUT generated C$53.3 million in revenue for the quarter ended March 31, 2022, against the C$32.0 million in revenue produced in the same quarter of 2021. Of that, C$49.3 million came from the 539 Bitcoin mined in the reporting period. Last year in the same quarter the company mined 539 Bitcoin for C$30.6 million in revenue. An increase in more efficient miners was the reason for the improvement, according to management.
Year-over-year, adjusted EBITDA increased by C$10.9 million to C$27.1 million. That was attributed to “higher digital asset mining profit.” Margins for mining operations increased from 57 percent last year in the same quarter to 67 percent. Again, that was the result of adding more efficient miners to its fleet. This was impressive when considering the price of Bitcoin was “slightly” down year-over-year.
As far as other revenue streams, hosting revenue dropped from C$1.4 million year-over-year, to C$0.8 million. The drop in revenue was the result of one of its customers selling its digital asset mining equipment to HUT. Concerning its high-performance computing operations, it generated C$3.3 million in revenue in the quarter, representing two months of operations after the acquisition of TeraGo Inc. This segment has about 400 customers at this time and is expected, as is, to generate about C$1.6 million in monthly revenue. HUT said gross margins in the unit should be in the range of 35 percent to 40 percent.
I know that HUT has touted its strategy of building out multiple streams of income, but I think it’s probably going to take several years to make any meaningful impact on the performance of the company. That said, under these economic conditions, adding about C$15 million or so to its revenue for the year could disproportionately help in the near term.
These ancillary businesses, especially the computer operations, are more of a long-term strategy that attempts to, in my opinion, alleviate some of the volatility inherent in the crypto sector.
Once the price of Bitcoin rebounds, most investors aren’t going to care much about the ancillary units HUT is trying to develop. Its share price will be determined solely by the price movement of Bitcoin. Again, years from now these strategies may pay off, but they aren’t going to have much impact, for now, outside of some needed revenue in the near term.
Anything will help under these economic conditions, but HUT’s primary growth will be correlated to the price of Bitcoin for the foreseeable future.
Balance sheet and access to capital
At the end of March 31, 2022, HUT held 6,460 Bitcoins in reserve, representing C$367.6 million. Since then, the company added another 309 in April, and the same amount in May, bringing the total held by the company to the above-mentioned 7,078.
The company reiterated its HODL policy, saying it didn’t sell any Bitcoin in the first quarter. A number of its peers have asserted the same yet have had to sell some of their Bitcoin in order to raise capital because it’s getting harder to raise capital via debt financing.
While that’s generally true, the company did manage to enter into an “at-the-market offering program” of USD $65 million in February, raising $32.5 million. Management stated it’ll use the capital to invest in growth.
This reinforces the fact that the larger Bitcoin miners do have a competitive advantage over most of its smaller rivals in regard to capital raise. This will offer opportunities most of its peers won’t be able to take advantage of. HUT is definitely in the category of the rich will get richer in that regard.
Conclusion
I’ve been reminding my readers lately that there is no doubt in my mind we’re still in a secular bull market, with the current correction being part of a temporary cyclical bear market. That’s important to understand in how investors look at volatile Bitcoin miners like HUT and how they trade or invest in them.
The entry point for HUT is very favorable at this time, and even if the price of Bitcoin drops further, as I expect it to, those engaging in dollar-cost averaging should have a very favorable cost-basis to generate solid returns over the next couple of years at least.
I really like where HUT is at in relationship to its peers. If it can manage to HODL most of its Bitcoin, it’s going to be able to leverage the price of Bitcoin strongly once it starts to rebound in price.
As far as I’ve been able to find, the only two companies based in North America that have more Bitcoin than HUT are Core Scientific (CORZ) and Marathon Digital (MARA). That’s important because the more Bitcoin a company holds the more flexibility it’ll have to make great long-term deals that’ll further separate them from their smaller peers, who have to focus on enduring the low prices of Bitcoin during these challenging economic times.
Before the smoke clears, I think a number of the smaller miners will be swallowed up by its larger competitors in a period of consolidation. HUT is positioned to be one of the companies that have the capacity to do so.
If the price of Bitcoin remains lower for longer, I think HUT may eventually be forced to sell some of its Bitcoin in order to raise capital, or at least to be used as collateral for a loan.
With a strong balance sheet and its growth in Bitcoin holdings, the company shouldn’t have any trouble navigating these turbulent waters while waiting for market sentiment for Bitcoin to reverse.
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