Shares of Bitcoin miner Hut 8 Mining Corp. (TSX: HUT) could face pressure over the near to intermediate terms, as a Bitcoin mining hardware manufacturer filed this month to sell its 38% stake in the company.
Amsterdam-based Bitfury, which is one of the largest private infrastructure providers in the blockchain system, has not specified whether it plans to sell its 37.2 million share stake in Hut 8 Mining through a public offering, block sales, or on a more gradual basis through the markets. Regardless, the sale of that large a stake would likely affect the share price of even the most liquidly traded stock.
Further complicating the prospective sale is Hut 8’s disappointing financial results, which have deteriorated dramatically over the last year, primarily due to the effects of the May 2020 Bitcoin halving event. Despite these quarterly figures, Hut 8 shares have nearly doubled since late September, largely on the back of the explosive rally in Bitcoin. Over the same period, the world’s most heavily traded cryptocurrency has appreciated around 75%.
Key Financial Parameters Continue to Trend Down
Hut 8’s key operating parameters continue to deteriorate on a quarter by quarter basis. Revenue in the quarter ended September 30, 2020 declined around 38% sequentially and a remarkable 78% from year-ago levels. Gross profits, after depreciating primarily computing equipment, turned negative beginning in 4Q 2019, and operating cash flow turned negative starting in 1Q 2020, a turnaround in both measures from robust results posted in 3Q 2019.
| (in thousands of Canadian dollars) | 3Q 2020 | 2Q 2020 | 1Q 2020 | 4Q 2019 | 3Q 2019 |
| Revenues | $5,755 | $9,230 | $12,740 | $14,858 | $26,750 |
| Gross Profit – After Depreciation of Computer Equipment | (5,662) | (6,372) | (5,036) | (11,629) | 10,665 |
| Operating Income | (841) | 2,460 | (7,227) | (18,491) | (249) |
| Adjusted EBITDA | (2,904) | (86) | (558) | 2,855 | 14,690 |
| Operating Cash Flow | (486) | (969) | (1,466) | 5,691 | 5,624 |
| Cash – Period End | 2,260 | 8,677 | 1,026 | 2,946 | 3,183 |
| Digital Assets | 14,119 | 12,386 | 1,401 | 10,484 | 9,277 |
| Debt | 27,006 | 27,583 | 28,700 | 26,039 | 26,456 |
Hut 8’s balance sheet is in reasonable shape, but that too has weakened. Its effective cash balance, including cash and cryptocurrency it has not yet converted to dollars, totals about $16.4 million, down from $21.0 million as of June 30, 2020. More than offsetting this is the company’s $27.0 million of open-term loans, all or any part of which can be called by the lender with five months notice.
Hut 8 Mining’s valuation may be getting stretched. The ratio of its enterprise value (EV) to trailing 12 months revenues is 3.7x, a figure generally associated with very fast growing companies. We cannot calculate the company’s EV-to-trailing adjusted EBITDA because its EBITDA over the last 12 months is negative.
It is possible that Hut 8 shares could ignore its fundamental issues and the prospect of a giant sale by the company’s largest shareholder and continue to trade as essentially a proxy for Bitcoin, as it has over the last three months. And if Bitcoin were to turn higher again after its recent dip, Hut 8 shares could follow.
Conclusion
Investors in Hut 8 Mining shares have over the past few months shrugged off the company’s weakening quarterly results and instead focused on the positive trajectory of Bitcoin and other cryptocurrencies. The company’s stock now faces a further, perhaps even stiffer challenge: the prospect of a re-distribution of nearly 40% of its shares to the market in a manner which is not yet specified. Particularly given how well the stock has performed in the last quarter, the near-term risk-reward ratio for Hut 8 Mining investors is increasingly looking less favourable
Hut 8 Mining last traded at $1.47 on the TSX Exchange.
Information for this briefing was found via Sedar 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.
