Bit Digital Inc. (BTBT) operates cryptocurrency mining machines across facilities in China and the U.S. If you’re not familiar with BTBT, this is a relatively new player in the segment as the company was previously known as “Golden Bull Limited”, officially changing its name this past September reflecting a strategic shift to focus on bitcoin mining which began in February of 2020. The move has paid off as Bitcoin is now trading at an all-time high supporting revenue growth and a positive long-term outlook. Shares of BTBT are up nearly 300% in the past 6-months. The company just reported its latest quarterly results managing to reach a positive operating income while quickly expanding the operation. What’s interesting here is that the company’s current mining capacity and revenue are already above some more high-profile peers, even as the stock is trading at a discount highlighting attractive relative value. We are bullish on bitcoin and see BTBT as well-positioned to benefit from the ongoing momentum.
Q3 Earnings Recap
Bit Digital reported its Q3 results on December 18th with revenue of $7.9 million based on 739.51 bitcoins received, implying $10,696 per bitcoin at corresponding to the approximate average market value of BTC in Q3. Favorably, the company was able to reach a positive operating income of $122k, considering $7.8 million in total expenses including the direct production cost of the mining operations such as utilities along with depreciation, and SG&A. EPS was effectively breakeven or marginally positive at $54k.
(source: Company IR/ annotation by BOOX Research)
The story here is the significant expansion in mining operations during the quarter. As of September 30, 2020, Bit Digital reached a hash rate of 1,250 petahashes per second “Ph/s” based on 22,869 mining rigs in operation including 16,944 acquired during the quarter. The company subsequently closed a deal in early December to acquire 17,996 additional bitcoin miners with a total hash rate of 1,003.5 Ph/s. The purchase worth of $13.9 million was funded through the issuance of 4,344,711 common shares, at $3.20.
Bit Digital is currently reporting a total of 40,865 mining rigs across its current facilities in Xinjiang and Sichuan Provinces in China along with new operations in Nebraska and Texas in the United States. Considering both the increased capacity nearly doubling the output from Q3, and the climbing market price of Bitcoin, the efforts support significantly higher revenue potential. On the other hand, management mentioned in the press release that the build-out costs of the new facilities to launch the additional miners will also translate into a sharp increase in the cost of revenues.
Finally, the company ended the quarter with $522k in cash and equivalents, $600k in restricted cash, along with a market value of $652k in cryptocurrencies on the balance sheet. With more updated data through November 30th, Bit Digital held 122 bitcoins which correspond to an approximate market value of $2.8 million at the current BTC to the USD exchange rate of ~$23,000 per BTC. A financial current ratio of 3.7x and no long-term financial debt highlights a strong liquidity position as a fundamental strength in the company’s investment profile.
(source: Company IR/ annotation by BOOX Research)
It’s worth noting that during the quarter, in conjunction with the corporate name change, the company disposed of its legacy peer-to-peer lending business and the car rental unit in China. The company still controls the subsidiary “Golden Bull USA, Inc”, and expects to pursue car rental business opportunities in the United States once the pandemic is curtailed as a separate operating segment.
Analysis and Forward-Looking Commentary
We’ve been bullish on Bitcoin over the past year recognizing the favorable market dynamics and positive outlook for the asset class. An article we published here on Seeking Alpha back in October highlighted the growing adoption of blockchain technologies across various sectors along with the trend of cryptocurrencies being more accepted among institutional investors as an important asset class representing positive tailwinds for the pricing outlook.
Efforts by companies like payments giant, PayPal Holdings Inc (PYPL) which now accepts cryptocurrencies as payments and exchange on its platform, continue to give credibility to a view that Bitcoin is here to stay. Separately, we believe bitcoin benefits from some of the same trends supporting precious metals like historically low-interest rates, ongoing dovish monetary policies among global central banks amid current macro uncertainties.
In our view, bitcoin miners like Bit Digital and peers including Marathon Patent Group Inc (MARA), Riot Blockchain (RIOT), and CleanSpark (OTC:CLSK) among others are well-positioned to benefit from the ongoing bull market in Bitcoin. We are intrigued by the latest results from BTBT which are impressive compared to this peer group.
First, BTBT is the only company in this group that was profitable in Q3 with significantly higher revenue at $7.9 million compared to $840k for MARA, $2.0m for CLSK, and $2.5m for RIOT. Notably, CLSK has separate businesses beyond crypto mining and is not a pure-play on crypto.
BTBT’s latest reported 40,865 mining rigs in current operation is also greater than 33,560 announced by MARA expected to be deployed over the next year. Riot Blockchain just purchased an additional 15,000 mining rigs that will expand its total fleet to 37,640 ASIC machines. CleanSpark has approximately 3,400 rigs in operation.
(source: company filings/ table by BOOX Research)
What we are highlighting here is that the market cap of Bit Digital at about $275 million at the time of writing, the stock is trading at a significant discount to MARA with a market cap of $890 million and RIOT at $990 million. The caveat here is that different mining machine models correspond to varying levels of operational hash rate and power efficiency so it’s unclear what final effective capacity will be as these companies deploy their full investments.
Our take is that Bit Digital simply appears undervalued vis-a-vis these comparables. Some of the explanations that could justify such a spread include that some of BTBT’s operating facilities are in China while the other companies have announced more aggressive expansion plans. MARA expects to deploy more than 30,000 mining rigs over the next year compared to just 2,060 operational at the end of Q3 and is a stock we have previously been bullish on. MARA also has taken steps to contract electricity at favorable rates with an energy partner as an additional bullish tailwind.
Simply annualizing the Q3 revenue rate for BTBT to $32 million, the stock is trading at a price to sales ratio of 9x, which will well below 261x for MARA, 103x for RIOT, and 77x for CLSK with the same back of the envelope calculation. The challenge in setting a valuation metric is that the market is currently trading off of sentiment towards the Bitcoin pricing environment as the cryptocurrency has more than doubled over the 3 months. All of the bitcoin miners are generating more bitcoins at higher prices.
Bit Digital delivered impressive Q3 results while the operating and financial outlook has only improved throughout Q4 with the strong momentum in bitcoin prices. We believe shares have more upside as its valuation can converge higher to its peer group of crypto mining stocks. Overall, we rate shares of BTBT as a buy with a price target of $8.00 per share representing about 30% upside from the current level.
At the end of the day, the stock price performance is going to depend on what bitcoin does. BTC currently trading at $23,000/BTC is exposed to potentially wide swings of volatility making BTBT a relatively high-risk and speculative stock. Interested investors should only consider a small position in the context of a diversified portfolio while averaging into an allocation to attain a lower-cost basis.
The risks we see beyond the downside to bitcoin prices and sentiment towards cryptocurrencies is that the company underwhelms in terms of revenue growth and bitcoin output over the upcoming quarter. There is an expectation that costs and expenses will remain elevated as BTBT builds-out its new facilities in Kansas and Texas. It’s likely the market will focus on operating margins as a sign of efficiency.
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