Summary CLSK's core investment thesis is centered around being the only miner that is gaining meaningful network share and at a sustainable cost basis. While CLSK's cost basis has normalized from CY2023Q3 levels, a concerning uptrend in cost basis emerged and recorded a 31% increase YoY. This increase in cost basis could potentially change CLSK's profitability prospect from massively positive to simply break even, which has significant implications for its valuation. CLSK's current Implied Bitcoin Price (IBP) is $149,000 and is trading at the 2nd highest Price-Book Value Ratio, which implies no outperformance should be expected. While CLSK remains a wonderful company, its valuation is a lot less than fair. Introduction After a thorough sector analysis , we found that what set CleanSpark ( CLSK ) apart from the rest was that CLSK remained the only Bitcoin miner that gained network share and at a financially sustainable cost basis. Thus, even though CLSK was overvalued (as the rest are as well), CLSK remained as our go-to miner to invest in and our number-one pick. While it has only been slightly more than a month after our recent coverage, CLSK has released its CY 2023Q4 financial report and rallied 177%. What we found in CLSK's latest financial report could potentially dethrone CLSK and break our core investment thesis for CLSK. Before we can understand the implications and impact of our findings, we need to explain the core investment thesis for CLSK. Figure 1. CLSK Outperforming The Entire Bitcoin Mining Sector (YChart) CLSK's Core Investment Thesis Every Bitcoin mining company has its own unique investment thesis. For Marathon Digital ( MARA ), it could be its largest mining capacity (Table 1) and Bitcoin reserves (which we do not think it should be ). For Hut 8 ( HUT ), it could be its second-largest Bitcoin reserves (which we also do not think it should be ; Table 1). Table 1. Sector Bitcoin Reserves and Mining Capacity as of January 2024 Company Bitcoin Holdings Actual Current Capacity (EH/s) MARA 15741 26.7 RIOT 7,648 12.4 CLSK 3,573 10.9 BITF 804 6.5 HUT 9116 7.2 HIVE 1,939 3.85 IREN 0 6.2 For CLSK, our core investment thesis is founded on 2 key unique and simultaneous characteristics that are not found among other Bitcoin miners including MARA, Riot Platforms ( RIOT ), Bitfarms ( BITF ), HUT, Iris Energy ( IREN ), and Hive Digital ( HIVE ). These 2 key characteristics are: Growing Bitcoin Network Share Sustainable cost basis (total all-in business cost per Bitcoin mined) The key significance of growing network share is its direct relationship to Bitcoin production. As there can only be a fixed amount of producible Bitcoins each year and the Bitcoin network represents the sum of every active miner's capacity, the larger share in the network directly contributes to larger Bitcoin production. CLSK's growing network share implies that CLSK's Bitcoin production can continue to grow to further increase revenue. The key significance of CLSK's sustainable cost basis is the degree of profitability extractable from each Bitcoin produced. Prior to CY2023Q4, CLSK's cost basis (all-in business cost per Bitcoin) stood at an average of $33,000 per Bitcoin. This implies that CLSK earns $20,000 in net profit for every Bitcoin mined at $52,000 per Bitcoin (as of the time of writing). This profitability also increases CLSK's ability to HODL more Bitcoin which further contributes to higher book value and intrinsic value (valuation) when Bitcoin price increase (which we expect). In 2023Q4, CLSK sold a total of 1,257 Bitcoins (562 in Oct , 402 in Nov , 293 in Dec ) when Bitcoin climbed from $26,000 to $44,000 during the period. Notice that the Bitcoins sold decrease as the Bitcoin increases. In January, CLSK only sold 6.4 Bitcoins as Bitcoin trades significantly higher than CLSK's $40,000 per Bitcoin cost basis. The inverse is also true. Therefore, the synergy between a growing network share and a sustainable cost basis is critical to a Bitcoin miner's overall profitability and financial health, and thus, its valuation. This synergy is not found in other mentioned Bitcoin mining companies and explains CLSK's massive outperformance over the sector. For instance, IREN has a better cost basis than CLSK at $33,640 per Bitcoin (Table 2) but has a declining network share. Table 2. Cost Basis Per BTC Comps Quarter (CY) MARA RIOT CLSK BITF HUT HIVE IREN 2023Q4 40,000 31,600 2023Q3 39,900 65,800* 60,452 44,600 80,500 53,700 2023Q2 39,500 51,500* 37,050 41,300 70,800 45,400 33,640 2023Q1 32,100 97,740 33,276 26,600 70,900 37,000 2022Q4 44,400 53,200 30,500 34,200 59,900 48,000 Source: Author The synergy between a growing network and a sustainable cost basis is especially true during the upcoming new halving cycle where Bitcoin producible per block is halved. This implies that the cost basis per Bitcoin will be doubled. Since we expect the Bitcoin price to peak at $90,000 and average $66,000 in 2024, only IREN ($63,200 = $31,600*2) and CLSK's ($66,000 = $33,000*2) mining operations are expected to be financially sustainable. On the other hand, MARA and BITF would barely break. However, we found a disturbing trend in CLSK's cost basis after the release of its CY2023Q4 financial report. CLSK's New Cost Basis and Its Implications In our previous coverage for CY2023Q3, we specifically noted CLSK's huge spike in cost basis from $37,050 to $60,452. We did not take it as something serious and anticipated some form of normalization back to the low $30,000. We were partially right. CLSK's CY2023Q4 cost basis stands at $40,000 per Bitcoin (= [$30mil Depreciation + $29mil Cost of Revenue + $5mil G&A + $1.5 Professional Fees + $15.3mil Payroll] / 2,019 Bitcoins Produced), which still averages in the low to mid $30,000 range ($35,000) excluding the one-off spike in CY2023Q3. At a $35,000 per Bitcoin cost basis, CLSK is fully profitable based on the Bitcoin reward per block and Bitcoin's price as of the time of writing. However, if you look closely to the trend of CLSK's cost basis, we can't help but notice a worrying upward trend. An increase from $30,500 to $40,000 implies a 31% increase in 4 quarters. While this increase may still cement CLSK with the lowest cost basis (Table 2), the impact of this 31% increase is critically on our core investment thesis for CLSK. Recall that CLSK's outperformance is explained by the perceived profitability derived from two components: increasing Bitcoin production and low cost basis. This profitability cannot function without either components. CLSK's $40,000 per Bitcoin cost basis is equivalent to $80,000 post halving. At the expected average $66,000 Bitcoin price, CLSK is no longer profitable. This has significant implication. This implies CLSK's profitability could turn from massively positive to none. At the very least, significantly reduces its profitability. So if CLSK is priced highly for its massive profitability potential, this increase would've invalidated CLSK's current high valuation. Based on our model which successfully called CLSK's run-up and outperformance, CLSK is in the deep overvaluation zone. Valuation Since CLSK is not expected to be profitable at this cost basis, CLSK's intrinsic value will fall on its book value, which represents the value of all equipment and Bitcoins on the balance sheet. On this basis, CLSK is trading at one of the highest multiple (Price to Book Value). Data by YCharts Another metric we can use to compare the relative valuation is the Bitcoin price that could justify a miner's current valuation, we call this the Implied Bitcoin price (IBP). This IBP would bring the sum of a miner's book value and operation value at 5x earnings to equate the miner's current market. The lower, the better. CLSK's IBP is $149,000 at $80,000 per Bitcoin basis (all-in business cost; post halving). A $149,000 Bitcoin price would provide CLSK an adjusted book value of about $1.2bn adjusted book value (= $48.46mil cash + $637.5mil PP&E + $27.8mil Prepaid + 3,573 Bitcoins x $0.149mil per Bitcoin - $52.2mil Total Liability). At 22 EH/s and 12% QoQ network growth rate, CLSK is expected to produce about 6,800 Bitcoins annually, which translates to $470mil annual earnings (= [$149.000 - $80,000] x 7,000 x 5). At 5x earnings multiple, CLSK's mining operation would be worth $2.3bn, totaling $3.55bn valuation when book value is added. This matches CLSK's current market cap. Table 3. IBP Comps Company Implied Bitcoin Price MARA 161,151 RIOT 168,571 CLSK 148,843 BITF 188,527 HUT 134,769 HIVE 131,237 IREN 87,696 Source: Author Table 3 represents the IBP for each Bitcoin miner. On this basis, it is observable CLSK's IBP is somewhere in the middle. It is not as bad as BITF's, but it is nowhere close to IREN's. This implies that the asymmetric upside potential is no longer available. Therefore, there is evidence showing investors should no longer expect performances similar to January, where CLSK massive outperformed the entire sector. This implies that if Bitcoin increases, CLSK would also increase at a similar rate to other miners simply based off Beta. Verdict By the end of this article, we hope that you can understand the severity of CLSK's uptick in cost basis found in CY2023Q4. We believe that this finding will have disproportional impact on CLSK, considering why CLSK outperformed the entire sector in January 2024. As Warren Buffett put it: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. CLSK is still a wonderful Bitcoin miner. We still think that CLSK's problem is still not a fundamental problem because CLSK is still expected to gain more network share and also will not be unprofitable. However, the change in prospects from profitability to simply breaking even could be severe for CLSK's valuation. This change in prospect makes its price a lot less than fair. Nevertheless, CLSK could still trade up when Bitcoin trades up, simply based off its Beta to Bitcoin. As for us, CLSK's current risk-reward ratio just isn't to our appetite. We maintain our orders at around $5.20 buy limit. It may sound ridiculous, given it is priced at $16.50 as of the time of writing. We're just not comfortable entering at the current price for the reasons discussed in this article, and are willing to forgo the corresponding potential reward. We'll continue to HODL Bitcoin.
