Why CleanSpark, Cipher and Iris are Poised to Outperform in This Cycle.
Publicly listed Bitcoin miners currently represent a market capitalization of around $20 billion, comprising just 1.5% of the total Bitcoin capitalization. As we approach the imminent halving event this month, followed by the subsequent stabilization, all indications point towards Bitcoin miners poised to outperform Bitcoin itself by a significant margin. Investors are increasingly recognizing the unique value proposition of miners, viewing them as a leveraged play on the price of Bitcoin. With fixed operational costs (mainly energy) firmly established, every upward movement in the BTC price translates directly into increased free cash flow, leading to substantial profitability for miners. Moreover, with gross margins exceeding 60%, these figures are primed for further enhancement, amplifying the allure of investment in miners.
Additionally, the growing prominence of transaction fees, now accounting for approximately 10% of total miner rewards, serves as a catalyst further propelling miners towards outperformance. This combination of factors underscores the promising potential for miners to deliver superior returns relative to the broader market, marking an exciting opportunity for investors seeking exposure to the thriving cryptocurrency sector.
However, as the saying goes, not all miners are created equal. Here, we aim to outline the characteristics of miners that we believe will be most appealing to large US-based institutional investors, who will be the primary drivers of capital allocation. In highlighting these characteristics, we identify CleanSpark, Cipher and Iris Energy as best in class and list the characteristics and provide valuation metrics to gauge how high the stock prices of these three companies could rise in this bull run.
Firstly, preference will be primarily accorded to entities exercising complete operational control, wherein companies both own and oversee the management of data centers, thus exerting direct control over Bitcoin production. Building a sustainable presence entails adherence to thorough processes, devoid of shortcuts. Some operators have attempted to expedite the scaling of Exahashes through a model emphasizing subcontracting and asset-light strategies. However, as we have seen such approaches have resulted in operational and financial underperformance, underscoring the importance of a comprehensive and hands-on approach to infrastructure management.
Secondly, priority will be assigned to firms based in the United States, conducting their operations within the country’s borders. This criterion holds paramount importance for vast majority of US fund managers, who typically lack the expertise to navigate risks associated with unfamiliar jurisdictions and are mandated to focus on US stories. Despite potential cost advantages in energy prices in locations such as Kazakhstan, Ethiopia, Paraguay, Argentina, or the UAE, the overwhelming majority of US fund managers exhibit a preference for domestic investments, particularly when the scale of operations is substantial. This inclination stems from the desire to minimize regulatory uncertainties and geopolitical risks inherent in international ventures, thereby fostering a more secure investment environment for stakeholders. Therefore, the pivotal question arises for Iris Energy, headquartered in Sydney, Australia. It becomes imperative for Iris Energy to relocate its headquarters to the US, thus opening the doors for a substantial influx of US institutional capital into the narrative.
Thirdly, an evaluation will be conducted based on the size and liquidity of companies. Institutional investors, particularly large funds, place a premium on liquidity metrics such as free float and daily trade volume. Additionally, corporate governance practices will be scrutinized as the third criterion, emphasizing transparency and accountability. This entails assessing factors such as board independence, protection of shareholder rights, and adherence to ethical standards. Robust corporate governance is essential for instilling investor confidence and ensuring the fair treatment of all stakeholders. By prioritizing companies with strong liquidity profiles and exemplary corporate governance practices, investors can mitigate risks and position themselves for sustainable long-term growth and value creation.
Finally, the comprehensive analysis will encompass an evaluation of each company’s capital reserves and their capability to secure additional funding for their ambitious growth strategies. This evaluation will also consider the potential dilution to existing shareholders resulting from these funding initiatives. Ensuring the sufficiency of capital reserves to sustain expansion efforts and navigate unforeseen challenges effectively is imperative. Moreover, understanding the funding requirements for scaling operations and the potential impact on shareholder ownership is crucial for making well-informed investment decisions.
In this realm, Cleanspark emerges as the most well-prepared entity, boasting robust capital reserves. However, it also harbors the most ambitious expansion plans. With the introduction of the new $800 million ATM, this target is projected to surge to 70 Exahash. Anticipate announcements of new M&A activities in data centers. Here, close attention must be paid to the price the company is willing to pay and the quality of assets involved. However, based on historical behavior, there is confidence that Cleanspark will exhibit discipline in its approach.
On the other hand, Cipher and Iris have opted for greenfield buildouts, a more prudent approach despite requiring additional time. This strategy ensures that everything is constructed from the ground up, tailored to the specifications of the companies’ operations teams. Cipher, with its flagship project Black Pearl, aims to achieve 25 Exahashes by YE25, while Iris, with its gem Childress, targets 20 Exahashes by YE24. An intriguing observation arises: despite Iris’s one-year faster completion translating into roughly 1600 BTC more than Cipher in the short term, Cipher already holds 1741 BTC compared to Iris’s zero. Therefore, in the short term, this one-year head start appears to balance out. However, in the longer term, both companies are poised to possess state-of-the-art data centers operating within a very competitive 2–3 c/kwh range and possessing the most modern fleet. They are likely to serve as industry flagship data centers for years to come. One noteworthy point is that Cipher possesses approximately 8 Exahashes of Bitmain rigs that it can accelerate and deploy by YE 2024. Hence, it wouldn’t be surprising if the company engages in post-halving M&A activities to reach 18 Exahash by 2024. Such a move would undoubtedly be a very positive development. Iris on the other hand also posesses land portfolio and executed connection agreements for 2,160MW which will undoubdetly come in handy in the future.
In this bullish market, the vast majority of miners are poised for success. Notable mentions include Bitfarms, which boasts a solid setup. However, its substantial investment in locations like Paraguay and Argentina for Megawatt deployment may deter many large US institutional investors due to various risk factors. While Bitfarms is expected to perform well, it could have achieved even greater success if its entire energy footprint were within the US, similar to the three aforementioned companies. But it is what it is.
Another interesting narrative is Terawulf. With its excellent energy infrastructure offering a super competitive all-in rate of 3.3 c/kwh in the United States, it has a solid foundation. However, it is still grappling with legacy issues stemming from overpaying for Bitmain rigs couple of years ago and reducing its debt. The company’s ambitious plans to fund 28 Exahash remain undisclosed. Although the CEO noted that the company currently generates a daily profit of $500k, this figure may decrease to $250k per day or $7.5 million per month post-halving. And to finance the additional 18 Exahash growth, we estimate the company will require approximately $400 million through an ATM (18 * 22 j/th * $1 million/MW). This represents a significant capital requirement for a company with a market capitalization of just $700 million. While other miners are adequately funded, $WULF will be playing catch-up. Nevertheless, there is a silver lining, and we believe Terawulf may be a prime acquisition target. Therefore, it holds a small place in our portfolio precisely for this reason.
Now, transitioning to valuations, we’ve set a target of 70 Exahash for CleanSpark, 25 Exahash for Cipher, and 20 Exahash for Iris Energy. In order to calculate these valuations, we utilized the companies’ reported all-in energy costs as well as their target J/TH (joules per terahash) metrics. Additionally, we factored in a 10% transaction fee for Bitcoin transactions. Moreover, we made assumptions regarding the issuance of post ATM shares to provide the necessary capital for the Exahash rollout, and we budgeted $50 million annually for Selling, General, and Administrative expenses (SGA).
We conducted Bitcoin price projections ranging from $100K to $300K and applied EV/EBITDA multiples of 20, except for Iris Energy (IREN) where we used a multiple of 15 due to its headquarters in Sydney. We refrained from incorporating any artificial intelligence (AI) valuations or assumptions in this analysis as its way to early to estimate its impact.
Based on our calculations, our price targets are as follows: CleanSpark between $155 and $225 (median $190), Cipher Mining between $47 and $66 (median $57), and Iris Energy between $55 and $80 (median $68).
We firmly believe that achieving a 10–15x upside is entirely feasible amidst the ongoing Bitcoin mega bull run expected within the next 18 months. Therefore, we advise investors to remain patient as the valuation of these companies’ narratives continue to unfold.
