Summary The company is richly valued. The rise in the company's stock price has exceeded the rise in the company's holdings of Bitcoin. The growth of the company's data centre related services makes a compelling reason to buy. Preamble Bitcoin has without a doubt become mainstream, even the US government are more than delighted to see the whole cryptocurrency ecosystem expand for reasons explained in an article titled; “ Bitcoin's Appreciation Will Benefit The U.S. Government .” There have also been reports that Russia is now using Bitcoin to facilitate International trade. Given such tailwinds, there seems little to prevent Bitcoin’s continued upward trajectory. Anticipating a rise in the price of Bitcoin, albeit with volatility, many investors seek out investment vehicles, such as Bitcoin miners, that can potentially amplify returns during periods of price appreciation. Consequently, this article endeavours to value Hut 8 ( HUT )(HUT:CA) as a potentially attractive investment option for this purpose. Valuing the company as a Bitcoin proxy is no easy matter, given that most of the revenue is derived from subsidiaries outside of “digital Asset Mining.” If you check out the latest Form 10 Q , you can see that about 74% of the company’s business income appears to be unrelated to Bitcoin mining. Then we need to consider the fact that the company is in the growth phase and so capital will need to be raised to finance this expansion. On the most recent earnings call , CFO, Sean Glennan, did not rule out the possibility of the use of a variety of dilutive instruments to raise cash; warrants, share issuance, et cetera. But first, let’s investigate the Bitcoin related segment of the company’s business. Bitcoin Mining As of September 2024, the company held 9,106 Bitcoin, however, on December the 19 th , the company spent around $100 million on another 990 Bitcoin, taking their total to 10,096. The company appears to be following MicroStrategy's playbook of borrowing to finance purchases. In July, the company secured a $150 million loan from Coatue Management and this was followed by confirmation of an amended loan of $65 million in January from a subsidiary of Coinbase. Armed with the number of total Bitcoin, and assuming a price of $100,000 each, we can calculate the market cap to Bitcoin ratio. In this way we can get an idea how much the market is valuing a company’s bitcoin reserves. It is possible that the miners with a higher ratio indicates that the market assigns additional value to the company's future potential and operational efficiency, lower production costs, for instance. Company Bitcoin Holdings Value of Holdings ($) Market Capitalization ($) Market Cap to Bitcoin Value Ratio Marathon Digital Holdings 44,893 4,489,300,000 5,840,000,000 1.30 Hut 8 Corp 10,096 1,009,600,000 2,460,000,000 2.44 Riot Platforms, Inc. 17,722 1,772,200,000 4,470,000,000 2.52 Operational Efficiency Using the latest data, we can see that while Hut 8 has a lower hashing capacity relative to some of its peers, less energy is required to produce Bitcoin, leading, by implication, to reduced cost of production. Company Joules / Tera Hash Hashing Capacity Cost of production Of 1 Bitcoin Marathon Digital Holdings 20 J/TH, 53.2 EH/s, $42,805 Hut 8 Corp. 15.7 J/TH 24 EH/s $31,482 Riot Platforms, Inc. 21.9 J/TH 31.5 EH/s $35,376 Not only is the energy requirement lower, but the company have made every effort to continue to reduce the cost of power. Cost Of Power (Hut 8 Presentation) Price To Earnings Ratio The Price-to-Earnings ratio is conceivably the most widely used of all fundamental valuation metrics in investing. In my experience, it is usually the first metric investors learn when analysing stocks due to its simplicity and effectiveness in assessing a company's worth. Despite its popularity, the P/E ratio has limitations. For a start, it doesn’t account for debt, cash flow, or future growth potential. Additionally, companies with negative earnings will have a negative or undefined P/E ratio, reducing its usefulness in those cases. Nonetheless, it remains a key starting point for evaluating a company's relative value. Another issue is that the P/E doesn’t account for dilutive instruments such as warrants and the like, which could be an important consideration with go-go growth companies that need to raise finance for expansion plans. For Hut, as of September 2024, there were common shares outstanding of 91,078,961, together with total dilutive shares of 5,861,808 (Warrants, options, RSU and DSU). Armed with this data we can calculate the impact an exercise of these instruments could have on the current P/E ratio. For the purposes of this exercise, I’ve assumed that the earnings for the quarter are repeated for the following 3 quarters without change. Current Share Count Dilutive Instruments Current Annual Earnings Earnings Per Share Current P/E Earnings Per Share With Dilutive Instruments P/E With Dilutive Instruments 91,078,961 5,861,808 $3,600,000 $0.0395 670.44 $0.0371 740.52 So, we can see that the dilutive instruments increase the current P/E ratio by around 10.5%; hardly a dealbreaker at the current elevated P/E ratio. Forward P/E Ratio This ratio is a kind of guesstimate as it is based on forecast earnings, so it can be misleading. However, I wonder how many investors take a look at this and use it as a basis of investing without a second thought? So, how about the current forward P/E ratio of 37.49; cheap for a miner, you might think. If we plug in a few numbers, it’s a relatively simple matter to gauge the expected future earnings and compare to the current assumed annual EPS of $0.0395. Current Share Price Forward P/E Ratio Forward EPS Current EPS Expected Growth in EPS $26.9 37.49 $0.72 $0.0395 1,716.5% Even the most ardent of Hut 8’s investors would consider EPS to grow by 1,716.5% over the next 12 months a big ask. Back in September 2023, earnings of -$0.01 were reported, so that is a 200% increase over 12 months, pretty good, but nowhere near 1,716.5%. But, how about the increase in book value per share resulting from the surge in Bitcoin’s price, one might ask. Book Value per Share I for one bought Hut because of the increase in book value per share resulting from the rise in the value of Hut’s Bitcoin holdings. The table below suggests that the share price may have exceeded the book value per share by a wide margin. Bear in mind that Hut’s share price in September 2024 was around $11.00. Its also worth remembering that approaching 50% of the company’s Bitcoin were pledged as collateral for loans. Bitcoin Holdings September 2024 Approximate Price Of Bitcoin September 2024 Total Value Of Bitcoin Holdings Current Price of Bitcoin Increase in Value Per Share 9,106 60,000 546,360,000 103,000 4.3 So, we can see that the increase in the value of the company’s Bitcoin holdings per share was only around $4.30, yet the stock price has increased around $16.00. Even if Bitcoin rises another circa $40,000 per coin this year, the total value of Bitcoin holdings will still be less than the recent rise in stock of $16.00. Bitcoin Holdings January 2025 Approximate Price Of Bitcoin January 2025 Total Value Of Bitcoin Holdings Imagined Rise Of Bitcoin By $40,000 Increase in Value Per Share 10,171 103,000 1,039,888,000 143,000 4.4 As mentioned in the preamble, approaching 75% of Hut’s operations is outside of Bitcoin, and this portion of the business has seen increasing revenues. Other Businesses Energy An interesting part of Hut’s business is energy generation, given that cheap energy is vital part of any strategy to improve profitability. Indeed, the company have been emphasising their “ power first approach ” for quite some time. The company has expressed their intention to grow this portion of the company, and in February 2024, they announced the purchase of four natural gas power plants in Ontario, in collaboration with Macquarie Equipment Finance Ltd. This acquisition had an immediate impact on quarterly income. To quote; “revenue grew more than five-fold year-over-year to $7.9 million, driven largely by $5.4 million in power revenues from our four natural gas power plants in Ontario.” High Performance Computing And Managed Services Whilst this business segment was established in 2021, it began in earnest with the acquisition of the cloud and colocation data centre business from TeraGo Inc. The purchase gave the nascent segment of Hut a stable revenue stream from “approximately 400 commercial customers, across a variety of industry verticals including gaming, visual effects and government agencies.” Since then, the business has grown and now has circa 40 employees dedicated to this business. In addition, the company has acquired a number of very high-profile clients, including Interior Health , a regional health authority in British Columbia. As regards revenue growth for these sectors of the company, there has been a dramatic rise to say the least. In September 2023, income was $4.777 million, but in September 2024, revenue had grown by circa 407% to reach $24.241 million. What was once a sideline to Bitcoin mining has now become the lion’s share of the business. There is every indication that revenues will continue surging as the company continues to add new innovative services. In a press release, the company indicated that their new “GPU-as-a-service vertical is now fully operational and generating revenue.” The beauty of these data centre services is that once you have the infrastructure built, new revenues go straight to the bottom line for the most part. For the sake of argument, let's assume that revenues grow by an additional $20 million YoY, what impact could this potentially have on EPS. Well. if you do the math, it works out to be an additional $0.22 a share; a long way from $0.72. However, this would give us a quite respectable 550% increase (From $0.04 to $0.26 in EPS), which is not beyond the realms of possibility, given that the last quarterly report indicated a 407% increase in revenues YoY. Summary Reviewing Hut 8, I see a company that's far more complex than just a Bitcoin mining operation. While they hold 10,096 Bitcoin and maintain efficient mining operations with lower energy costs compared to competitors such as Marathon and Riot, what's particularly interesting is that a such a sizeable chunk of their business income now comes from non-mining operations. While the stock's current valuation metrics raise some concerns, when one considers the potential of their data centre services, the story is compelling.
