Summary TeraWulf is a zero-carbon bitcoin mining company with facilities powered by hydro and nuclear energy in the US. The company's share price has declined since going public but has shown recent improvement, with a 1-year return of over 211%. TeraWulf's access to low-cost energy and plans for expansion into HPC and AI zero-carbon infrastructure position it for future profitability and revenue diversification. TeraWulf ( WULF ) is a company developing and operating zero-carbon bitcoin mining facilities. Two of its facilities are based in the US and are powered by hydro and nuclear energies. Upon the merger with IKONICS , WULF became publicly traded in 2021 and raised $200 million of capital. However, the share price has declined significantly since reaching an all-time high of $42 towards the end of December 2021, at the time of anticipation of WULF going public. Nonetheless, WULF kept surviving after hitting $0.79 In March 2023, with the stock trending upwards and trading at $2.5 today, delivering a 1-year return of over 211%. The stock could have also delivered higher returns had WULF not been moving sideways YTD. WULF's YTD return stands at merely 6%. I initiate my coverage with a buy rating. My 1-year price target of $2.8 presents a 15% upside from the current price of $2.46. Financial Reviews YCharts Fundamentals had been shaky, though has improved as of late. Upon raising over $200 million in the go-public transaction, WULF spent over $177 million to build out its facilities in 2021. In the next two years, WULF continued to invest a smaller amount for its facilities build-out each year, while also raising more money from a mix of debt and equity issuances. Within the same period, revenue has seen a significant increase from just $15 million in 2022 to over $69 million in FY 2023. Despite still being unprofitable, the GAAP net loss margin has also considerably narrowed by over one-sixth. YCharts Though GAAP net profitability is lacking, cash from operations / OCF has continued to improve and even reached a breakeven in FY 2023. In FY 2023, WULF generated $4.3 million of OCF. I believe the demonstration of its ability to reach positive OCF is a positive development since WULF should ideally rely less on external financing. Having gone through debt and equity issuances over the past two years, equity dilution has been pronounced, though debt management has been decent. Debt-to-equity / DE ratio has been trending down due to a series of repayments and as of FY 2023, stood at 0.6x, a decent figure. Considering the cash and short-term investments of over $54 million, track record of repayments and capital raising, and also improving fundamentals, I would say that WULF may have a safe liquidity position and outlook. Catalyst In FY 2024, I believe WULF's production cost leadership in bitcoin mining and its planned expansion into HPC / High-Performance Computing and AI infrastructure should help drive profitability as well as future diversified revenue generation. Considering that energy cost makes up almost 90% to 95% of the total cost of producing bitcoin , it remains the biggest cost driver for any bitcoin mining project. Nonetheless, this has not been the case for WULF. With the relatively blended low-cost electricity of $0.035 / kWh across both of its facilities, WULF's energy cost has only accounted for around 54% of the total cost of production today. company presentation Though the figure will potentially rise to around 56% after a halving period in FY 2024, the increase is relatively moderate and should not put pressure on WULF's profit margins, in my opinion. TheMinerMag A report by TheMinerMag further suggests that the recent increase in electricity cost due to increased competition and rates has impacted WULF's competitors, such as Iris Energy. Iris Energy has seen a consistent upward trend in electricity cost per bitcoin mined over the past two years. As of the start of the year, its electricity cost was $18.7k per bitcoin. TheMinerMag WULF, however, has shown a rather steady trend of cost movement. Aside from the sharp electricity hike in January 2024, which was a special case that impacted all of the bitcoin miners, WULF's electricity cost per bitcoin mined has been mostly in and around $10k, which is exceptional. At $16.7k in January, WULF's electricity cost per bitcoin was also still over 11% lower than Iris Energy's. company presentation In my view, the key success factor for WULF lies in its infrastructure. By selecting sites with significant energy surpluses, WULF has been able to negotiate a long-term energy generation contract at a relatively low cost per kWh. In FY 2024 and beyond, I believe WULF's access to steady low-cost energy generation with zero carbon footprint should serve as a competitive advantage. This is particularly important considering WULF's projected expansion into HPC and AI applications. In my opinion, WULF today indeed is in a good position to secure HPC and AI site development contracts with hyper scalers, such as Microsoft, Google, or Amazon, primarily due to the available capacity and also WULF's strong ESG positioning due to the zero carbon footprint: Investments in cloud infrastructure by prominent hyperscalers such as Microsoft, Amazon, Meta, Oracle, and Google have experienced impressive average annual growth, exceeding 30% over the past five years. In 2022 alone, these entities collectively spent $158 billion. The demanding specifications of hyperscalers necessitates sites capable of accommodating several hundred megawatts to sustain multiple data center buildings ranging from 40 to 80 megawatts each. These locations must also offer direct access to extensive contiguous land suitable for constructing data centers, power banks, parking facilities, loading zones, and ancillary buildings, access to water to run in the most efficient manner, and critically must adhere to a sustainable ESG framework. TeraWulf is uniquely positioned to fulfill all these requirements. Source: Q4 earnings call. The ESG agenda will continue to present a catalyst for WULF, in my opinion. The proposed facility for HPC and AI will be in Lake Mariner, where the energy generation comes from hydropower, which should comply with the ESG requirements of WULF's potential clients, most especially the hyperscalers. As per a report , many IT leaders from various organizations will continue to face pressure to integrate ESG elements into business operations. Moreover, IT leaders' compensation may also be linked to their ESG achievements: By 2027, 25% of CIOs will see their personal compensation linked to their sustainable technology impact," writes Autumn Stanish, senior principal analyst at Gartner. "Responsibilities for sustainability are increasingly being passed down from CIOs to infrastructure and operations (I&O) leaders to improve IT's environmental performance, particularly around data centers," Stanish adds. Source: IT Pro. Risk Despite the promising ESG positioning and cost leadership, I believe risk remains moderate. The process towards revenue diversification is still pretty early at this point, and in my opinion, WULF may potentially see an increase in operating expenses as it ramps up activities in business developments for the HPC and AI applications. Furthermore, I also think that the situation post-halving is still unpredictable. For instance, the fact that miners' rewards are also halved for each block generated may result in temporarily lower revenue for WULF, effectively pressuring profit margins. On the flip side, the reduced rewards may also be offset with the higher transaction fees, while the bitcoin halving may also provide an opportunity for WULF to boost its hash rates by acquiring and improving less efficient miners potentially shutting down due to mining incentives falling below sustainable levels. Valuation/Pricing My target price for WULF is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection: Bull scenario (50% probability) assumptions - I conservatively expect WULF to achieve an FY 2024 revenue of $200 million, a 189% growth, slightly lower than the market's high-end estimate . I assign WULF a forward P/S of 7.5x, which implies a share price appreciation of $4. In this scenario, I would expect WULF to maintain a steady profit margin upon halving and see early success in its expansion into HPC and AI. Bear scenario (50% probability) assumptions - WULF to deliver FY 2024 revenue of $100 million, missing the low end range of the market's estimate. In this scenario, I expect WULF to see a correction to $1.5, as a result of lower revenue generation due to halving. own analysis Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $2.8 per share, presenting a potential upside of 15% from the current level. At this point, I would give the stock a buy rating. As an important note, due to the lack of guidance provided by WULF, I have applied conservative approaches in building my price target model across bull and bear scenarios. Using market's revenue estimates as a base, I considerably lowered WULF's FY 2024 revenue estimates for both scenarios while also assuming a 50% increase in average shares outstanding. As such, my projection implies that WULF will be doing some equity issuance to further dilute investors in FY 2024, potentially for repayments and funding for the HPC and AI projects. With all of those in mind, the 15% upside here still presents attractive enough risk-reward, in my opinion. Conclusion WULF is a leading bitcoin miner with strong cost leadership due to its strategic mining infrastructure. Given the low-cost electricity and zero-carbon energy generation, WULF is also well-positioned to expand into HPC and AI applications business by building out ESG-focused infrastructure for clients like the hyperscalers. Nonetheless, the halving event which may also cut rewards in half still presents uncertainties not just for WULF but for the rest of the players. My highly conservative price target of $2.8 implies a 15% upside, which should be attractive. In my opinion, at $2.46, WULF appears undervalued.
