Hut 8 (HUT) Stock: A Strongly Positioned Bitcoin Miner

Hut 8 Mining (NASDAQ:HUT) is among my top picks in the Bitcoin (BTC-USD) mining industry, as it continues to grow revenue in difficult market conditions while maintaining a strong balance sheet.

I like the management’s decision to continue to HODL his Bitcoin, saying that it “doesn’t make sense to sell Bitcoin at low prices just to finance additional Bitcoin mining, and we are aware that the halving is not too far away.”

With its first full quarter of generating fee-based monthly recurring revenue via its 5 data centers, increase in the number of Bitcoins mined and growing exahash to 2.78, the company was able to generate solid revenue in challenging market conditions.

In this article, we will look at these various elements of the company, along with the latest earnings report as HUT positions itself for strong growth as the price of Bitcoin makes a sustainable recovery.

Latest income figures

For Q2 2022, the company generated $43.8 million in revenue, a 31 percent year-over-year increase from $33.5 million in revenue generated in Q2 2021. The bulk of this was driven by Bitcoin mining, with high-performance computing business adding $4.7. million to the total, in its first full quarter under the company’s control.

As for the amount of Bitcoin mined in the quarter, it came in at a solid 946, significantly up from the 553 Bitcoin mined in the same period a year ago. Management attributed the increase to an increase in hash rate and improved efficiency from upgrading and expanding the size of the ASIC fleet.

Turnover costs in the quarter rose to 47.7 million dollars, compared to 16.6 million dollars in costs the previous year. Most of it came from increases in operating costs and depreciation.

The jump in depreciation came from adding about $178 million in new mining equipment and infrastructure over the past year. It also included costs associated with $25 million in fixed assets from the newly acquired data center.

Margins from mining shrank from 62 percent last year in the same reporting period to 38 percent this year in the 2nd quarter. Most of it was a result of lower Bitcoin prices and an increase in electricity costs.

In its high-performance computing business, margins are expected to be in the range of 35 percent to 40 percent. As a result of some lower-margin products and services in its HPC business, the company withdrew its Q1 2022 revenue growth guidance. Still, management says it expects “profitable revenue growth in 2023.”

Adjusted EBITDA in the quarter was $6.8 million, down from $14.4 million in Q1 2021. I consider these good numbers when considering the economic environment in which the company operates.

The company’s balance sheet remains solid, with a cash balance of $60.1 million at the end of the quarter. In February, it made a $65 million IPO and has raised $61 million in the first half of 2022. In August, the company said it had established an ATM program where it could sell up to $200 million in common stock on the Nasdaq .

As of June 30, 2022, the company had 7,406 Bitcoins in reserve, valued at $188.8 million. Considering its balance sheet management, the company stated that it has been able to HODL for the long term and has not sold any Bitcoin as of the beginning of 2021. If the price of Bitcoin does not plummet and stay low for an extended period of time, I think HUT will be able to continue to HODL. If the price drops significantly and stays down, it will likely have to sell some Bitcoin to raise capital. That said, it has options with the ATM program, so it has a good chance of keeping most, if not all, of Bitcoin if the price reverses direction near the latter part of 2022 or early 2023.

The reason I mention that time frame is because it will be much clearer what the Fed actions will be through 2023.

I’m not suggesting that there won’t be an uptick before then, just that the most likely and sustainable uptick in Bitcoin prices will come near either side of the new year.

Most recently, at the end of Q2 2022, they had increased their exahash to 2.78, and by the end of the year they expect to be at 3.55 exahash.

August update

In August, HUT generated another 375 Bitcoin, an average of 12.1 Bitcoin per day. The company said that the HODL strategy for the newly mined Bitcoin remains in place, as the company will deposit 100 percent of Bitcoin into custody.

The total Bitcoin balance as of the end of August was 8,111.

Hash rate improved from 2.78 at the end of June to 2.98 at the end of August. At the rate the hash rate is growing, it looks like it’s going to come very close to the 3.55 exahash expectations by the end of 2022.

The company added an additional 180 NVIDIA GPUs to its data center in Kelowna, BC, which is currently mining Ethereum (ETH-USD). As “machines with multiple workloads, the company will be able to use the same machines to provide “artificial intelligence, machine learning or VFX rendering services to customers.”

High performance computing device

While the company’s relatively new high-performance computing is interesting and provides needed revenue, in reality this is a very long-term project for HUT that will take time to reach its potential in light of the company’s purpose for the device. .

After the unit was integrated into the company, it had to sift through the offerings to remove or clean up low-margin and/or poor-performing products or services. Management said it has completed the process and is ready to expand its HPC infrastructure to attract the kind of customers who want higher margins.

In the long term, the long-term objective of developing the HPC business and “working the stack” is to generate enough revenue to finance the mining business without having to access the capital markets.

The reason it is important is because of the volatile nature of the price of Bitcoin itself. For example, with the plunge in the price of Bitcoin, finding debt financing has been difficult for many miners. By eliminating or reducing its reliance on capital markets to raise the necessary capital, it could finance its mining operations cheaply without having to seek capital.

I’m usually skeptical of companies that go outside of their core business, but in the case of HUT, Bitcoin mining is very straightforward and straightforward, and it doesn’t take much extra effort to run this simple business model. For that reason, I don’t see there being much distraction or disruption to building an HPC business that, if successful, could be a major source of revenue and capital to grow the company for many years into the future.

Big risks

Although the company has done as well as can be expected in a very challenging economic environment, while being able to access capital without having to sell Bitcoin in 2022, it still faces the risk of further degradation of the price of Bitcoin.

If Bitcoin falls closer to the $12,000 market or lower for a sustainable period, the business model will come under pressure, as will those of its peers.

I think under that scenario the company will be forced to sell off some of the Bitcoin, and possibly a significant amount, depending on the length of an extremely low price Bitcoin environment.

The other uncertainty is whether the company will be able to carry out its plans for the HPC business. If not, it will have to find other ways to finance the company in the long term. This is not an immediate problem, but it could be if the price of Bitcoin comes under pressure over a longer period of time.

I don’t think either of these scenarios are likely, but they are definitely a possibility. Investors should keep that in mind when considering taking a position in HUT.

That said, HUT is positioned as well as any Bitcoin miner to endure hardship for quite a long period of time. It is impossible to quantify how long that is, because it will depend on the price Bitcoin will fall to.

Conclusion

I like the first balance strategy of HUT, and I think that any Bitcoin mining company that does not take a similar stance could experience some strong growth challenges going forward.

As management has stated, its long-term vision is built on three foundations: mining Bitcoin; maximize their Bitcoin reserves; and focus on growing and expanding the HPC business.

With available cash on hand, Bitcoin reserves and access to capital via its ATM programs, the company has more than enough resources to invest in and grow its business over the next year or so. And that doesn’t include the increase in Bitcoin as a result of further mining.

If it is able to continue mining Bitcoin at the recent pace, HUT is in a good defensive position from which to work to expand its business while many of its competitors are forced to sell Bitcoin to raise capital.

Overall, HUT is in my four mining companies that I have positions in. It’s definitely worth a much closer look from those looking to invest in a speculative play that has extraordinary upside, especially now that it’s trading below $2.00 per share as I write .