HUT 8: A Cryptocurrency Stock With High Growth Potential

Summary Hut 8 Corp. is a high-growth cryptocurrency stock with potential for investors looking to diversify their portfolio. The fear of halved rewards since bitcoin halving could actually benefit Hut 8 due to increased demand and reduced competition. Despite challenges such as the recent halving and a shareholder lawsuit, Hut 8 is in a stronger position with a new CEO focused on efficiency and regaining shareholder trust. Investment Thesis & Stock Performance Hut 8 Corp. (HUT) is much smaller than competitors, but its higher growth potential together with a newly gained efficiency initiated by a new CEO since February make it the most interesting “cryptocurrency stock” bet in a bitcoin halving year for investors that wish to diversify their equities portfolio. Hut 8, despite being smaller than better known Riot Platforms Inc. (RIOT) and Mara Digital Holdings Inc. (MARA), remains a significant player in the bitcoin network, contributing to 1.3% of its overall processing power. 2024 is a bitcoin halving year, with the halving that occurred on April 20. The bitcoin halving fear sparked a stock sell-off for Hut 8 and for other crypto miners. The stock is currently trading at an attractive price level: approximately 60% below its high and 14% above its low. Stock Price Performance (Seeking Alpha) However, a good investor masters the art of catching falling knives. And that involves facing fears and investing despite the volatility. In the case of Hut 8, the fear of halved rewards could actually turn into a major tailwind. Indeed, the bitcoin supply being capped at 21 million coins, the rising demand typically outstrips the reduced rate of supply every four years, leading to a strong price increase. Therefore, although miners receive less bitcoin, the price increase of each bitcoin compensates for the reduced rewards. Furthermore, inefficient miners that cannot support a sudden halving of rewards run out of business. Only the most efficient ones survive, and they actually benefit from the reduction of competition in the sphere. For that reason, the stock rose after the 2020 halving with a time lag effect and, in my opinion, is likely to rise again this year after the most recent halving. But there will be some crypto miners that will drop out and Hut 8 needs to make sure it will be in the surviving lot. For now, after the halving two weeks ago, it would be too early to jump into conclusions. And that is precisely the reason why a long position initiated now would still be for speculative purposes and should remain a smaller portion of an investor's portfolio. Despite Challenges To The Bull Case, the Company Is In A Stronger Position Than Ever Hut 8 faces a double challenge: the reduction of BTC rewards from April 2024 and a lawsuit from the shareholders. Both could dictate the end of the company. Looking back at the halving, the company did seem to have taken the time to be well prepared. Indeed, the new CEO insisted on the “efficiency” of operations and took the difficult, yet wise, decision to shut down the Drumheller mine in Alberta, Canada, earlier this year. Given that the 2024 bitcoin halving caused the per-block rewards for bitcoin miners to decrease from 6.25 BTC to 3.125 BTC, it is fundamental for the company to continue focusing on its efficiency even after the recent halving. The Drumheller mine in Alberta was the most inefficient one: it used 11% of Hut 8’s hash rate (i.e. the company’s computational power) to mine only 1.4% of the company’s bitcoin output ! The once successful and key mine in Canada turned into a burden because the energy cost has risen approximately tenfold in the last seven years, according to data from Energyrates.ca. On the other hand, Hut 8’s ambitious expansion plan includes the construction of a large facility in Texas, where the company expects a $275,000 construction cost per megawatt. This is a highly attractive opportunity, given it is about 40% less than the $460,000 per megawatt that Marathon spent on two mining facilities in December. Over the long-term, it is these types of ambitious decisions by the new CEO that could make Hut 8 beat or at least rival the top competitors. But at least as much as the newly gained corporate efficiency, it is the shareholders’ trust that the new CEO, Asher Genoot, wants to regain. The fast the top management changed in February is, in my opinion, bullish for the stock over the medium and long-term. Indeed, Asher Genoot replaced Jaime Leverton who resigned on February 8, after allegations of legal issues in relation to the merger between Hut 8 and US Bitcoin Corp causing the shareholders to file a lawsuit against the company. The shareholders essentially contest that insufficient information was disclosed to them in relation to the merger (de facto acquisition) of US Bitcoin Corp. (USBTC) with Hut 8, such as the existence of a common large shareholder which could be a potential conflict of interest. J Capital Research, a famous investigative U.S. company, published a report affirming that USBTC would have allegedly gone bankrupt without the merger… Thankfully, there has been a clean-up in the top management and the arrival of the new CEO in February could help improve the operational efficiency and regain the shareholders’ trust. Stock Picking Is Not Only About Management, It’s Also About Hard Numbers and Balance Sheet Looking at the figures, Hut 8 is on a bullish long-term momentum with growth recorded on many aspects. First, the earnings mark a positive evolution in the recent months. Indeed, in the 6-month period since the USBTC merger in June 2023 until December 2023, Hut 8 reported a net income of $6.2 million on revenue of $60.6 million. In the same period the year before, the company had incurred a net loss of $81.3 million. From an EBITDA standpoint, we witnessed the same extraordinary growth: its adjusted EBITDA reached $62.3 million, up from $12.8 million a year earlier. The rapid growth from a financial standpoint indicates the company is currently scaling its operations and that the business is also benefitting from a rise in bitcoin price. Based on their website, they have 23 openings at the time of writing against currently 219 employees, meaning there are approximately 10% of new open positions, which further confirms the stock is a high growth investment. It is very difficult and to some extent irrelevant to refer to traditional valuation metrics when evaluating high growth stocks, especially when it comes to so-called cryptocurrency stocks. Hut 8 remains indeed a speculative bet given the high growth profile and nature of operations: its entire revenue stems from the sale of digital assets, namely bitcoin, that is a recurring topic of heated discussions in the world of investments. The debates continue even after the (reluctant) approval of ETFs by the SEC and the growing institutionalization of the cryptocurrency, causing the buyer base to grow. One of the valuation metrics we would need to use would be a rather unconventional one, pegged to the value of a digital asset. Indeed, the BTC holdings already cover almost all of the stock value today, as Hut 8’s holdings in bitcoin ( 9,110 coins per last official figure of February 29, 2024 ) are valued at around $500-550m with the current price range of $55-60k per coin. The valuation per se is attractive, as it means that the sale of all bitcoins held by Hut 8 would cover the entirety of the shares’ value. Of course, bitcoin is extremely volatile, and the company’s shares tend to recurrently lose or gain over 5% per trading day. Therefore, from the balance sheet perspective, the business is in a good position to survive the halving of rewards that just happened given the large BTC holdings. When we zoom a little closer in our review, the business is rather healthy. Balance Sheet of Hut 8 (Q3 2023 Financial Statements) The current ratio is a liquidity ratio that shows the ability of a company to pay its short-term obligations. A current ratio equal or superior to 1 means the company is able to cover its short-term due expenses with the liquidity it possesses. Given the halving of BTC rewards and immediate reduction of new liquidity, this aspect is particularly important for crypto miners at the moment. Hut 8’s balance sheet from the last available financial statement (Q3 2023, post merger with USBTC) boasts an impressive 4.6x multiple of current assets over current liabilities. This ratio allows the company to accumulate bitcoin over time, as it needs to sell less BTC to finance its operations. Public Miners' Bitcoin Holdings (2022) (CryptoSlate) Indeed, Hut 8 is one of the very few miners which holdings grow over time. The chart is from 2022. The last available BTC holding figure of 9,110 from February 2024 shows that the accumulation of BTC continues. Last but not least, the total hash rate under Hut 8 management currently stands at 22.3 EH/s3, roughly where large competitor Marathon stood at the start of the year and above Riot Platforms . Hut 8, despite being considerably smaller than Riot in terms of market capitalization, owns more bitcoins than Riot, indicating the crypto miner runs its operations efficiently. This efficiency allows Hut 8 to have a low cost of bitcoin mining: each mined bitcoin cost the company $18,815, roughly 27-30% of each coin’s market value (currently $60,000 to $65,000). This allows for a significant margin of 70%, constituting a comfortable buffer to adapt to the halving of BTC rewards. Bottom Line The stock is highly attractive given the recent price drop. The price dropped due to BTC reward halving fears and shareholders’ lawsuit, but high growth potential, operational efficiency and renewed management may justify a speculative investment in the stock. The company has already shown that it is scaling its operations rapidly in an effort to catch up on its principal competitors, Riot (3x Hut 8’s market cap) and Marathon (6x Hut 8’s market cap), with investments in physical facilities and in staff growth. Investors who seek to gain exposure to the cryptocurrency sector to diversify their portfolios should definitely look at Hut 8, which has more room to grow in relation to its two much larger competitors, but also a key advantage: Hut 8 has deep knowledge of Canada and its energy infrastructure, and this could potentially play a crucial role for the sector, in case the U.S. regulators become stricter on cryptocurrency regulation due to money laundering, tax evasion and energy consumptions issues regularly raised in the public debate. Bitcoin remains a speculative bet, however investing in Hut 8 could reveal to be a lucrative investment given the current low share price beyond bitcoin price activity - as long as the bitcoin price does not extend its recent decline too far down.