In light of our recent success with Cleanspark ($CLSK), which yielded an impressive 350% return, we are excited to present Cipher Mining as our next investment gem. Currently trading at $3,40 — a significant discount compared to the Big Three: Marathon ($MARA), Cleanspark ($CLSK), and Riot Blockchain ($RIOT), we believe Cipher Mining possesses the fundamentals and growth potential to warrant a Conviction Buy recommendation targeting $9. With the Bitfury share overhang FUD gone, its fully integrated approach to bitcoin mining and strategic positioning in the market with great energy asset footprint, we believe Cipher Mining is primed to catch up to the Big Three. We view the current 3x delta on EV/Current Exa and EV/Target Exa comps as completely unwarranted and are convinced this gap should close in near future.
Fundamentally, we are excited about the Cipher story for the following three reasons:
First, Strategic Assets: Cipher Mining stands out as a fully vertically integrated bitcoin mining company, leveraging its expertise and strategic partnerships to drive operational excellence and sustainable growth. Cipher’s strategic acquisition of 600 MW of energy at industry record low rate of 2.7 cents/kwh in Texas, a jurisdiction known for its favorable business environment underscores its commitment to optimizing operational efficiency and minimizing costs. By securing long-term contracts with energy providers, the company has mitigated risks associated with fluctuating energy prices, thereby enhancing its profitability and sustainability. The recent acquisition of the ERCOT approved “Black Pearl” 300 MW project in Texas further solidifies Cipher Mining’s energy security and cost advantage, positioning it ahead of competitors in the industry. Having first secured the energy footprint (and not the other way around as is customary in the industry), Cipher went ahead and forged contracts with leading equipment providers for 24 Exahashes of computing power, positioning itself as a key player in the global bitcoin mining ecosystem.
For a bitcoin miner, profitability hinges on two key factors: energy cost and miner efficiency. Our analysis underscores the paramount importance of low-cost energy in driving profitability, especially as we approach the post-halving phase. With the upcoming halving set to reduce the monthly emission of BTC from 27,000 to 13,500 bitcoin per month, the significance of energy cost becomes even more pronounced. As illustrated in our accompanying table, the data demonstrates that low-cost energy outweighs miner efficiency in terms of its impact on profitability. For example comparing Cipher’s 1 MW at 2,7 cents/kwh and 28 j/th efficiency generates around 0,084 mln in profits every month vs Big Three comparable 1MW generating around $0,081 mn in profits (at 4,2 cents/kwh and 26 j/Th). Post halving, already in 2 months, Cipher drops to $0,032 mln per month vs $0,025 mln for the Big Three. This underscores the critical role that energy cost optimization plays in the success of bitcoin mining operations, particularly in navigating the evolving dynamics of the cryptocurrency market.
Second, we firmly believe that Cipher Mining’s full vertical integration and unwavering focus on bitcoin mining are pivotal to its success. Much akin to the operational model of $CLSK, Cipher operates as a fully vertically integrated bitcoin miner. This strategic approach holds immense importance as it allows Cipher to exert control over every aspect of production and operations. The presence of on-site repair teams significantly minimizes downtime, thereby translating into enhanced production efficiency. We commend Cipher’s steadfast commitment to bitcoin mining, without the distraction of pursuing ventures in AI, hosting, or cloud services. It’s imperative to recognize that bitcoin mining demands undivided attention, given its complexity and the rapidly evolving nature of the cryptocurrency landscape. Venturing into unrelated sectors with disparate technical requirements would not only dilute resources but also divert focus from Cipher’s core competency. Moreover, the architecture and data center prerequisites for efficiently running AI clusters vastly differ from those of bitcoin mining. We believe that competing with industry giants like Amazon, Microsoft, and Google in such realms requires substantial capital investment, which would be better allocated towards maximizing return on investment within core business domain of bitcoin mining.
Third, Experienced Management Team and Board: Led by Tyler Page, a seasoned executive with a wealth of experience in finance and technology, Cipher Mining boasts a management team and board of directors comprised of industry veterans and thought leaders. With backgrounds spanning top notch institutions such as NYDIG, Goldman Sachs, and Citadel, Cipher Mining’s leadership team brings a diverse skill set and invaluable expertise to the table. The addition of former Head of CFTC and NYMEX — Dr. James Newsome and prominent bitcoin advocate Caitlin Long further enhances the company’s credibility and institutional appeal, paving the way for sustained growth and market leadership.
In addition to the above fundamental reasons, we believe in the following Short-Term Catalysts that should propel re-rate of the story:
- Bitfury Share Concentration Removal: The recent elimination of Bitfury Group’s share overhang represents a significant catalyst for Cipher, as it paves the way for increased investor confidence and institutional interest. With the removal of this barrier, Cipher Mining is poised to attract a more diverse investor base and unlock additional liquidity, thereby enhancing shareholder value and market liquidity. Indeed, as per Bitfury’s recent press release it is estimated that the company free float will increase from 31% to 61%. We view this development as extremely positive for the company’s investment story.
- Earnings Call and Operational Updates: Cipher Mining’s upcoming earnings call on March 5th presents an opportunity for the company to provide investors with insights into its financial performance, operational execution, and strategic initiatives. Additionally, updates on the progress of its 24 Exahash deployment and potential adoption of new FASB accounting standards are expected to further instill confidence and drive positive sentiment among investors.
- Bitcoin Price Outlook: Positive sentiment surrounding Bitcoin, alongside the forthcoming halving event, is anticipated to fuel demand and bolster price appreciation within the bitcoin market. The recent introduction of Bitcoin ETFs has been remarkable, further enhancing expectations for a significant bullish trend as the halving draws near in less than 50 days. As a prominent figure in the Bitcoin mining sector, Cipher is poised to leverage these favorable market conditions, positioning itself for sustained growth and the creation of long-term value.
In conclusion, we initiate our Conviction Buy recommendation on Cipher Mining ($CIFR) at target $9 per share, based on its strong fundamentals, strategic positioning, and potential for value creation. With its focus on operational excellence, experienced leadership team, and favorable market dynamics, Cipher Mining is poised to catch up with the Big Three and establish itself as a key player in the bitcoin mining industry.
