Summary TeraWulf remains in a strong uptrend, with bullish technical indicators despite being overbought, suggesting pullbacks will be buying opportunities. TeraWulf's fundamentals show growth, with a 117% sales increase forecast this year and a shift to profitability expected in the next year. The company’s efficient capital allocation and secured financing for next year mitigate risks, supporting its aggressive growth and expansion plans. Despite a high EV/Revenue multiple and rapid share price rise, I maintain a Buy rating. Bitcoin ( BTC-USD ) miner TeraWulf ( WULF ) reported earnings on Tuesday, and the stock is thus far not reacting one way or the other on the news. The last time I covered the stock was back in August, and I called it a buy. Seeking Alpha That has turned out pretty well as shares are up about 140% since then, and the post-earnings move down proved to be the exact bottom. The share price ramped in a parabolic manner into this earnings report, owed to a similarly shaped move in Bitcoin. But is all that good news priced in? Let’s take a look at the earnings report and an updated view of the valuation to see what we should do next. Uptrend firmly intact The beautiful thing about technical analysis is that it takes the emotion out of investing choices. Something is either in an uptrend, a downtrend, or is trendless. In the case of TeraWulf, it’s firmly in an uptrend, and unless that changes, we have to respect the price action. StockCharts The trend line was tested in early October and proved to be the start of another huge move up. The stock is extremely extended right now as Bitcoin’s move to new highs has generated euphoria in the miners. However, this chart is quite bullish and there’s simply no other way to view it. The PPO and the RSI are both overbought, but the best rallies are generally born of overbought conditions, as buyers overwhelm sellers. The 20-day EMA was tested in early November and was immediately bought by the bulls; that’s our clue as to where support should be on the next pullback. The 20-day EMA is rapidly ascending, but is still quite ways down at under $7. I would welcome a pullback to that level as I believe it would be a strong buying chance. TeraWulf is overbought to be certain, but this chart remains extremely bullish in my view. It doesn’t mean we won’t have pullbacks, but it is my belief those pullbacks will be bought. A fresh look at the fundamentals TeraWulf is a smaller miner and is very much in its growth/ramping phase, so metrics on profitability are less important. Think of this in a similar way that you would, of a software company that hasn’t yet achieved profitability; that comes with enough scale, and TeraWulf isn’t there yet. However, there are some valuable metrics we can examine to understand the fundamental picture, so let’s have a look. For the third quarter, TeraWulf mined 555 Bitcoin, which was down 43% year-over-year. That sounds bad, but keep in mind the halving took place in April of this year, making it doubly difficult to mine Bitcoin, all else equal. The company continues to ramp its capacity, which is helping to offset some of that. Indeed, its total self-mining hashrate capacity was 10.0 EH/s as of September 30 th , exactly double what it was a year ago. The total value of self-mined Bitcoin in Q3 was $33.9 million, up from $27.6 million a year ago. The power cost per Bitcoin was $30,448, which is sharply higher from just $9,322 in last year’s Q3. That was attributable to an approximate doubling in network difficult as well as the aforementioned halving. Of course, these factors impacted all miners, so this isn’t some deficiency TeraWulf has; it’s just the cost of doing business. Seeking Alpha These factors have led analysts to downgrade earnings expectations for this year in recent weeks, with all four recent revisions being lower. That’s never a good thing and I won’t try to explain it away; we want revisions moving higher. However, given the early stages of TeraWulf’s growth plans, I think it’s more instructive to focus on the left side of the table above. We have sales growth of 117% forecast for this year, and about 80% in the next two years, respectively. We can also see that the company is expected to swing from a loss to meaningful profits in that time. That’s where I think the value is in TeraWulf, and why the stock has been bid up so aggressively in recent months. Obviously, as the price of Bitcoin goes higher, these estimates become much easier to meet and beat. The fundamentals of TeraWulf with Bitcoin at $90k are much better than the exact same fundamentals with Bitcoin at $70k. If you’re bullish on Bitcoin, you probably should be bullish on TeraWulf. The reason is because the cost of mining Bitcoin is the same regardless of the price of the coin, so higher Bitcoin prices produce massive operating leverage. This works in reverse, of course, so keep that in mind as you're looking at miners from a risk perspective. Investor Presentation Speaking of growth plans, the company is looking to continue scaling and sees capacity at the end of Q1 at ~13EH/s. That’s about 30% higher from today, and the important thing is that management is focused on profitable mining. The cost of mining is largely out of the control of miners (network difficulty, mainly). But one thing it can control is the efficiency of its miners, and the company is actively taking steps to improve efficiency, which should help drive the power cost per Bitcoin lower over time, all else equal. Investor Presentation Increased hashrate should result from the S21 Pro miners set to be received early next year, which should also boost the overall efficiency of the portfolio. The S21 Pro is the most efficient miner TeraWulf employs, and having 14.4k more of these will boost both the capacity and efficiency of the company’s fleet sizably. One thing we must always keep in mind with miners is that financing is generally a concern. Bitcoin mining is a hard business, and it costs a lot of money to run. TeraWulf’s capital allocation has been quite good in my view, as I mentioned back in August as well. Investor Presentation Next year’s capital needs are already taken care of, and it's hard to overstate how beneficial that is. TeraWulf should have about $300 million in cash on the balance sheet in Q4 of this year, and along with financing and free cash flow generated, should have something like $750 million available in total. Capex is slated to be less than $400 million, leaving estimated unallocated cash of $387 million. Some (or all) of this unallocated cash is likely to be used on the recent share repurchase authorization from the Board. I love buybacks, but hope that the management team is opportunistic with its purchases, buying on dips rather than chasing highs. Point being, there is no financing risk to TeraWulf's growth plans, and if anything, it can move some of its planned growth forward. Speaking of chasing highs, let’s wrap up with a look at the valuation. Too far, too fast? That’s the question here as TeraWulf has seen a meteoric rise in its share price in recent months. With the company unprofitable, one way to value it is EV/Revenue, which is below. TIKR There’s no way to read this chart other than to say the stock is expensive. We’re at more than 13X revenue today, which is extremely high based on TeraWulf’s prior trading history. Now, the counterargument to this is that companies that are growing quickly, and boosting profitability, should receive higher multiples. I subscribe to that belief, but I also recognize that the stock may be in need of a breather here to reset some of this valuation concern. Seen another way, we can value TeraWulf against Bitcoin itself, which we have below. StockCharts Bitcoin – since the September low – has risen about 64%. That’s nice, but it’s only half the rise in TeraWulf shares. That implies that TeraWulf has seen its valuation relative to Bitcoin double in the past two months, which is unsustainable. We know Bitcoin miners are generally leveraged plays on Bitcoin pricing, and this helps illustrate how that works. It works on the downside too, so if I have a concern about TeraWulf, it’s the current valuation. I see the fundamental picture as strong, and getting stronger. I see the price chart as very bullish and portending even higher highs in the future. I do think the valuation needs a breather before the next big rally phase can begin, but that’s really my only concern. Seeking Alpha Indeed, the Quant Rating shows similar concerns. Growth is excellent, as is momentum. I also think the ‘F’ rating in profitability will work itself out in the coming quarters as capacity ramps, so I’m really just concerned about the valuation going forward. That’s not enough to put me off the stock, however, so I’m sticking with my Buy rating after Q3 results.
