Summary Bit Digital's pivot to AI and HPC infrastructure has significantly boosted revenues, offsetting Bitcoin mining declines due to the halving event. The company maintains strong financial health with $59 million in cash reserves and minimal debt, despite share dilution from equity issuance for AI expansion. Q3 earnings will be crucial to assess AI revenue growth and its impact on overall profitability, especially amidst volatile Bitcoin prices. Bit Digital's strategic diversification into AI and gaming positions it for long-term growth, despite potential short-term stock price pressure from share dilution. Since I last covered Bit Digital (NASDAQ: BTBT ) on November 9, 2023, it is up by more than 90%, an upside not aligned with my Hold position, mainly because I had failed to anticipate the positive momentum imparted to Bitcoin ( BTC-USD ) by the launch of several spot ETFs in early 2024. Subsequently, as shown in the chart below, the stock slid below $2 around April, justifying my cautionary stance based on the BTC halving event. Data by YCharts My objective with this thesis is to show that further upside is possible based on how its strategic pivot from Bitcoin mining to focus on HPC (high-performance computing) infrastructure is bearing fruit. Also, given that the third quarter (Q3) financial results will probably be announced on November 19, I provide some insights into what to expect. To start with, one year since my last coverage, it is time for an update on how this miner has fared when it comes to its AI diversification strategy. Revenue Surge thanks to AI Diversification At that time, the company had invested approximately $35 million in 132 FusionOne HPC servers equipped with superfast H100 GPUs supplied by NVDIA ( NVDA ). These were used to build AI infrastructure for leasing to supersmart application developers as part of a hosting agreement expected to generate about $50 million in annualized revenue. This shift came amid the rising mining difficulty and the looming Bitcoin halving event, prompting the management to avoid concentrating capital on depreciating mining equipment. Looking into the execution, as of early 2024, the company reported an annualized revenue run-rate of approximately $50 million from its HPC segment, led by a key customer contract. Also, as a result of its strategic AI priorities, it has experienced significant growth as seen in the quarterly revenue chart below. Data by YCharts Looking deeper, in June 2024, it generated around $4.1 million in revenue from its AI operations consisting of 256 servers, contributing to a strong overall financial performance which helped to offset the revenue short falls due to the Bitcoin halving event where rewards were cut from 6.25 BTC to 3.125 BTC for each block mined. Thus, for the second quarter of 2024 (Q2), only 244.2 bitcoins were produced, or a 23% YoY decrease, but still, mining revenues increased by 80% YoY to $16.1 million , driven by higher asset prices. Assessing for the diversification success, HPC-related sales were $12.5 million during Q2 compared to nil the prior year. Adding $0.37 million from Ethereum staking, total revenue was $29.0 million, or a whopping 220% YoY increase. Looking at Capital Allocation needed to Support AI Growth Looking ahead, the aim is to achieve $100 million in annualized revenue from AI by the end of 2024, supported by an expanded contract including additional GPUs. To reach this ambitious goal will involve significantly expanding its computational capabilities with the installed GPU base climbing to 4,096 units, up from the 2,048 GPUs in mid-2024. Now, at $25K each, Nvidia's advanced parallel chips cost a lot of money, and it is important to check the capital allocation strategy. In this respect, as seen in the chart below, the financial position is relatively strong with substantial cash reserves of $59 million versus only $2 million of debt/lease obligations. Data by YCharts Moreover, while Bit Digital's sizeable equity issuance as shown in the above pale blue chart to fund its AI expansion has surely diluted its shares, but the fact that the capital raised has been utilized to enhance AI revenues in a way that has boosted growth by triple digits, shows it has been a positive strategic move. Furthermore, AI has not only helped the company diversify its business, but also contributed to making it less vulnerable to cryptocurrency volatility. This is further evidenced when comparing how its revenues have evolved after the Bitcoin halving period with much larger peers Marathon Digital Holdings ( MARA ) and RIOT Platforms ( RIOT ) as shown below. Data by YCharts Thus, diversification into HPC has not only helped Bit Digital attain a superior revenue growth of 80% during the last year but also helped to stabilize the net income, especially in a period where miners are negatively impacted both by lower rewards and higher costs due to inflation remaining above the Fed's target of 2% and interest rate at 4.83% . Extending the comparison to two Bitcoin miners have adopted a similar diversification strategy by integrating HPC into their business models, the chart below shows that Bit Digital has delivered better revenue growth than Core Scientific ( CORZ ) and Hut 8 Mining ( HUT ). Data by YCharts This means it deserves better. Valuations and Risks Now, the company trailing price-to-sales of 5.28x exceeds the median for the IT sector by 66.47% which may lead us to believe it is overvalued. However, as shown below , a more precise comparison with industry specific peers which have also diversified into AI infrastructure tends to show otherwise. Thus, averaging the trailing P/S of the three stocks gives 7.5x which exceeds Bit Digital's by 29.65% which is abnormal given the way it has been expanding revenues through AI. Thus, adjusting accordingly, I have a target of $5.56 (4.29 x 1.2965), based on the current share price of $4.29. Comparison with peers (seekingalpha.com) This about 30% upside remains below Wall Street's average of 43% but is justified by the following risks. First, a large part of the recent upside in the value of Bitcoin has been tied to the speculative optimism around President-Elect Trump pro-Bitcoin stance, notably transforming the U.S into a major crypto hub . Thus, there are expectations that his reelection will augur well when it come to reducing regulatory constraints. However, as evidenced by Marathon and RIOT revenues dipping after the halving and as I had elaborated in previous thesis , miners are still adjusting to the post halving landscape, while having to devote more effort to maintaining the profitability of mining operations. Of course, asset prices are currently up, but, these will have to stay up sustainably in order to make a meaningful impact on profits. This is the only way to motivate miners to HODL coins in contrast to disposing their production on the market thereby increasing supply and pressurizing asset prices. Moreover, it is important to have clarity on the forthcoming Republican administration's stance on digital assets, and, any news update which falls short of market expectations may have a drastic effect on Bitcoin’s price, especially since Bit Digital has not shifted away from mining, but merely diversified into AI. Extrapolating further, given the strategy to fund growth mainly through equity offerings and until AI revenues are significant enough, Bitcoin-led volatility can cause the share price to drop to such an extent of offsetting the cost of dilution from new equity. In this connection, as AI infrastructure is integrated deeper into its operations, the miner will need additional financing, and this is where it becomes important to watch out for Q3 earnings call to gain further insights into its progress. What to look for in Q3 Now, the company is expected to generate $22.91 million or a 98.17% YoY growth in the third quarter of 2024. Noteworthily, it has beaten consensus estimates four times during the last four quarters. Also, Q2’s actual sales exceeded consensus estimates by 8.7%, a feat made possible due to the average BTC prices remaining at $65.8K and consistent AI revenues since it was the first full quarter operations of the HPC business. seekingalpha.com This implies that during Q3, the AI revenue stream will become more "normalized" accompanied by relatively lower BTC prices compared to Q2. Additionally, the previously announced incremental 2,000 H100 GPUs with the anchor tenant whose revenue generation was to start in the late Q3 will no longer happen as they are reviewing their hardware portfolio, possibly to fit in newer NVIDIA's H200 GPUs. Therefore, it appears less likely for Q3's 98% expected revenue growth, which by the way is lower than Q2's 220%, to be beaten in the same way as previously. Still, as part of its collaboration with European cloud gaming company Boosteroid involving GPU rental, annualized revenues of $2 million to $3 million are expected to start flowing in 2024 and extend into 2025. Here, we are talking about $700 million of sales over five years. Therefore, depending on the execution, the ingredients to increase revenue projections for FY-24 which currently stand at $112 million , or 149% YoY growth are present as Bit Digital diversifies beyond crypto and AI to gaming. Another important metric to watch out for is EPS, which is expected to break even in the first quarter of 2025 as shown below. Now, this could receive an acceleration as HPC sales which are typically meant to satisfy high-demand AI applications as part of stable service contracts makes up for a greater portion of the revenue mix. This is also less sensitive to the price swings inherent to cryptocurrencies. www.seekingalpha.com In conclusion, Bit Digital is well on track to deliver on its AI infrastructure strategy with 43% of revenues already derived from HPC in Q2, or barely six months after diversifying into the new income stream. Additionally, the rapid scaling of this segment was timely enough to offset the revenue short fall from Bitcoin halving, as a comparison with other miners has shown. In the same vein, its capital allocation strategy utilizing a combination of cash reserves, digital asset sales, equity issuance, and sales-lease back agreement (financing tied to equipment) has kept debt very low. At the same time, revenue growing at a rapid pace has imparted momentum to the stock, offsetting the cost of dilution from new equity. Finally, despite some potential short-term stock price pressure relating to Bitcoin, its strategic pivot to enhance long-term growth involving Bitcoin mining and AI infrastructure without forgetting gaming, positions it for further upside.
