Hut 8 Mining Corp (HUT) is a cryptocurrency mining company with industrial-scale bitcoin mining operations in Canada. It provides investors with direct exposure to bitcoin without the technical complexity or constraints of purchasing the underlying cryptocurrency.
It is in the business of utilizing specialized equipment to solve complex computational problems to validate transactions on the bitcoin blockchain. The company receives bitcoin in return for the commercial activity of bitcoin mining.
I am bearish on HUT stock considering its gains of about 180% in 2021 are not fully justified by operating and financial performance, and bitcoin volatility is adding another highly unpredictable risk. Crypto stocks have several risks as we move into 2022, with the regulatory framework being on top.
Hut 8 Mining Business News
Early this month, the digital asset miner announced a series of ESG objectives for a more sustainable future. “Technology, sustainability, inclusivity, and innovation are part of our DNA at Hut 8, and we are proud to lead positive change in our sector, which we hope will build a legacy that our team and shareholders can be proud of,” said Jaime Leverton, Chief Executive Officer of Hut 8.
Among top objectives, the company is focusing on ways to achieve carbon neutrality for scope 1 & 2 GHG emissions by 2025, reduce emissions through technological and operational innovation, and maintain an executive management team gender diversity of over 40% women, plus a board gender diversity representation of over 30% women.
The latest production update for November 2021 reported that 265 bitcoins were mined, an average production rate of 8.83 bitcoin per day, and a total bitcoin balance held in reserve of 5,242 as of November 30, 2021.
The company stated that “Our NVIDIA CMP deployment is contributing revenue of approximately $140,000 per day, based upon current mining economics,” said Jason Zaluski, Head of Technology for Hut 8. “Given the low power intensity of these chips, our cost per bitcoin of approximately $3,000 means we are achieving unit margins in excess of 95%.”
I will analyze this in the risks section.
Q3 Earnings 2021: Record Quarterly Revenue
Hut 8 Mining reported a third consecutive record quarterly revenue. The company reported revenue of $50.3 million CAD compared to $5.8 million in the prior-year period, 905 bitcoins mined, and EPS GAAP of $0.12 (a beat by $0.02). As expected HUT stock earnings have been very volatile in the past quarters.
Financials: Strong, but Rising Costs and Stock Dilution are Main Concerns
Hut 8 Mining has very strong financials with no long-term debt as per the latest quarter and only $9.6 million in short-term debt. The company reported cash & cash equivalents of $223 million on its balance sheet in Q3 2021. Again, these are in Canadian dollars.
I am skeptical about the statement mentioned before about cost per bitcoin of approximately $3,000 and unit margins of more than 95%. Bitcoin mining is a competitive industry with thin profit margins, and the profitability is driven by the price of bitcoin, electricity, and the advanced computer hardware used.
I see an unstable profitability trend in 2021. The company had a net loss in Q2 2021 and site operating costs that increased significantly in Q3 2021 as the company increased its power consumption because of a higher hash rate.
Also, there was an offering of common shares on September 17, with gross proceeds of $220 million (US$173 million). These are negative factors that make it hard to sustain its 2021 stock price rally.
Hut 8 Mining has another negative factor to face: a cash burn problem throughout the past five consecutive quarters and the first nine months of 2021. Should bitcoin’s price tumble in 2022, HUT stock may face intense selling pressure.
Wall Street’s Take
Hut 8 Mining has a Strong Buy consensus rating based on four Buys assigned in the past three months. The average Hut 8 Mining analyst forecast of $ $18.51 implies 139.6% upside potential.
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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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