Bitfarms: Is There Further Downside Risk To This Crypto Miner?
On May 16, Bitfarms Ltd. (TSX: BITF) reported solid 1Q 2022 earnings. The company reported quarterly revenue of US$40.3 million and operating income and adjusted EBITDA of US$6.9 million and US$32.4 million, respectively. Investors reacted to the earnings details in the same way they have to almost all news released by Bitfarms (and other Bitcoin miners) over the last six months: they sold the stock.
Bitfarms stock declined 5.4% on May 16 and is down around 80% since early November when the Bitcoin price peaked. Over the same period, Bitcoin has lost about 57% of its value.
| (in thousands of US dollars, except for shares outstanding) | 1Q 2022 | 4Q 2021 | 3Q 2021 | 2Q 2021 |
| Revenue | $40,329 | $59,598 | $44,774 | $36,687 |
| Bitcoin Mined Period | 961 | 1,045 | 1,051 | 759 |
| Implied Bitcoin Price Reflected in Revenue | $41,966 | $57,032 | $42,601 | $48,336 |
| Variable Cost Per Bitcoin Mined | $8,700 | $8,000 | $6,900 | $9,000 |
| Operating Income | $6,874 | $15,004 | $34,090 | ($2,090) |
| Operating Cash Flow | ($29,232) | ($6,368) | ($13,506) | ($8,860) |
| Capital Expenditures | ($67,808) | ($60,820) | ($30,257) | ($73,400) |
| Adjusted EBITDA | $32,423 | $44,013 | $31,859 | $23,827 |
| Cash | $77,294 | $125,595 | $43,267 | $36,216 |
| Number of Bitcoin Owned | 5,243 | 3,301 | 2,312 | 1,293 |
| Debt | $152,983 | $84,742 | $77,123 | $21,499 |
| Shares Outstanding (millions) | 201.6 | 194.8 | 174.4 | 162.1 |
At a share price of around C$2.56, Bitfarms may have reached a level where it represents a solid value — regardless of significant further declines in the price of Bitcoin. Of course, if Bitcoin were to rally, Bitfarms shares would likely be swept higher in its wake.
The table below breaks out Bitfarms’ valuation based on three potential scenarios: Bitcoin prices of US$22,500, US$25,000, and US$30,000, respectively.
| (in US dollars) | At Bitcoin Price of US$22,500 | At Bitcoin Price of US$25,000 | At Bitcoin Price of US$30,000 |
| 1Q 2022 Actual Adjusted EBITDA | $32,423,000 | $32,423,000 | $32,423,000 |
| Implied Bitcoin Price Reflected in 1Q 2022 Actual Adjusted EBITDA | $41,966 | $41,966 | $41,966 |
| Assumed Pro Forma Bitcoin Price in 1Q 2022 | $22,500 | $25,000 | $30,000 |
| Reduction in 1Q 2022 Adjusted EBITDA at Assumed Realized Bitcoin Price | ($18,706,500) | ($16,304,000) | ($11,499,000) |
| Pro Forma 1Q 2022 Adjusted EBITDA | $13,716,500 | $16,119,000 | $20,924,000 |
| Annualized Pro Forma Adjusted EBITDA | $54,866,000 | $64,476,000 | $83,696,000 |
| Bitfarms Stock Market Value at C$2.56 per share | $400,700,000 | $400,700,000 | $400,700,000 |
| Add: Bitfarms Total Debt at 3-31-22 | $152,983,000 | $152,983,000 | $152,983,000 |
| Less: Bitfarms Cash at 3-31-22 | ($77,294,000) | ($77,294,000) | ($77,294,000) |
| Less: Value of Bitcoins Held in Custody at Assumed Pro Forma Bitcoin Price | ($117,967,500) | ($131,075,000) | ($157,290,000) |
| Enterprise Value Adjusted for Lower Value of Bitcoins Held in Custody | $358,421,500 | $345,314,000 | $319,099,000 |
| Ratio of Adjusted Enterprise Value to Adjusted Annualized EBITDA | 6.5 | 5.4 | 3.8 |
The baseline data point in all calculations is Bitfarms’ 1Q 2022 adjusted EBITDA of US$32.4 million. This cash flow figure is based on a realized Bitcoin price from its mining operations of US$41,966 (1Q 2022 revenue of US$40.3 million divided by 961 Bitcoin mined during the quarter).
If Bitfarms’ realized Bitcoin price had been US$22,500 in the quarter, its pro forma quarterly adjusted EBITDA would have been US$13.7 million, or US$54.9 million on an annualized basis. Bitfarms’ enterprise value (EV), adjusted for this lower Bitcoin price attached to the 5,243 Bitcoin it held on its balance sheet as of March 31, 2022, is about US$358 million.
This implies that even if Bitcoin were to decline about 25% from current levels to US$22,500, the ratio of the company’s adjusted EV to its adjusted annualized pro forma EV is only 6.5x. This multiple represents a low valuation ratio for a growth company.
Performing the same calculations at pro forma Bitcoin prices of US$25,000 and US$30,000 yields even lower EV-to-EBITDA valuation multiples of only 5.4x and 3.8x, respectively. Note especially that these multiples apply to Bitcoin price scenarios which range from well below the current price to present levels.
The chief reason that Bitfarms can maintain relatively buoyant pro forma cash flow at much lower Bitcoin prices is its low, largely hydro-based electricity costs. In turn, Bitfarms’ variable mining costs total only US$8,700 per Bitcoin mined.
Risk-tolerant investors may want to consider Bitfarms shares. Over the short term, the stock will likely oscillate based on cryptocurrency price movements, but eventually the stock market should realize the stock has already priced in an especially negative case scenario for Bitcoin.
Bitfarms Ltd. Last traded at C$2.34 on the TSX.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
