Canaan: Q3 Earnings, Is The 'Digital Gold' Rush Coming?

Summary Canaan's Q3 earnings report beat analyst expectations for top line revenue but missed on EPADS. The company increased the compute power sold by 92% year-over-year and improved the rate by 12%. Canaan's Avalon Nano 3 machine could conceivably generate increased interest from home miners if the psychological level of $100k BTC is breached. We are not yet in the 'gold rush' phase of the market judging by current Nano 3 prices, but BTC leads CAN stock higher if history is a guide. When I last covered Canaan Inc ( CAN ) for Seeking Alpha in March of this year, I rated the stock a 'hold' and noted the company's high cash burn and reliance on shareholder dilution for funding operations. The latter of which is certainly not unique to Canaan and is generally standard operating procedure among public Bitcoin ( BTC-USD ) mining companies. In this update, we'll look at Canaan's recently reported Q3 earnings report and assess if any further boost can reasonably be expected in the stock now that Bitcoin is seemingly surging toward a six-figure dollar-denominated coin price. What Canaan Does To briefly recap Canaan's business; the company derives most of its revenue from selling Bitcoin mining machines. The company's primary product line is the AvalonMiner machine - the most recent of which is the A15 series: Canaan Q3 Deck Subsequent to the end of September, Canaan announced sales of its A15 series machines to publicly traded Bitcoin miners HIVE Digital Technologies ( HIVE ) and CleanSpark ( CLSK ). The company also offers a consumer-focused miner via the Avalon Nano 3 machine. We'll get into that product a bit more shortly. In addition to selling machines to both consumers and major mining businesses in the industry, Canaan also has a self-mining operation that has typically generated between 10-20% of the company's quarterly revenue over the last two years. Canaan's Q3 Earnings For the quarter ended September 2024, Canaan reported $73.6 million in total revenue with $64.5 million in products revenue and just under $9 million in self-mining revenue. The company beat estimates on the top line but missed expectations on EPADS of -$0.27. Canaan While the company managed to reduce COGS year over year by 7% from $102.4 million to $95.1 million, Canaan still reported a gross loss of $21.5 million in Q3. Canaan Quarterly opex came in at $35.3 million which made the total loss from operations $56.8 million; this was actually an improvement from the $112.8 million operating loss in the period from the prior year but a larger operating loss sequentially. Breaking the company's figures down a bit more, Canaan increased the computing power sold by 92% year-over-year: Canaan The average selling price of that compute was $8.8 TH/s, which was up 12% year over year. Something I find interesting from that slide is the Nano 3 sales and revenue from those sales. At $1.4 million for 10,000 units, the Nano 3 generated roughly $140 per unit sold for Canaan last quarter. Canaan I actually think this is a fairly interesting product because it's marketed toward the general public rather than professional miners. When Bitcoin inevitably eclipses six figures, machines like this Nano 3 could conceivably be profitable as in-home miners if energy expenses are low enough. That said, the most realistic scenario is these types of home mining machines will fail to generate a positive return after all-in energy and machine purchase costs. But judging from the company's website, it appears as though December Nano 3 shipments are being sold at a discount. This is not what I'd expect to be seeing with Bitcoin's price nearing $100k. So where is "digital gold" fever? In a 'gold rush', there is certainly logic to being in the picks and shovels business. When digging for "digital gold," the shovels are computer chips. During the last cycle, the price of CAN exploded from under $2 per share in October 2020 up over $39 by March 2021: Data by YCharts What's telling to me from the chart above is the fact that it took the price of BTC rocketing over $30k per coin for CAN stock to enter a mania. This cycle, we have a Bitcoin price that is quickly closing in on $100k per coin yet CAN is still close to its nominal share price lows from August. The chart below is similar to a chart I shared in my last CAN piece: Data by YCharts Canaan had a negative net income in 2020 and a deeply negative net income in 2019 - thus, the depressed share price at that time shouldn't be all that surprising. But I think the story that this chart really conveys is pretty simple: Bitcoin led CAN stock and CAN stock led CAN's quarterly revenue. There is certainly no rule that says this has to happen again. But I actually don't dislike the stock down here if we do indeed get a six-figure BTC price. Balance Sheet Considerations Like many other Bitcoin mining stocks, operations are generally subsidized by shareholder dilution. This has certainly been the case for Canaan as well. The company continues to raise capital through preferred share sales and even announced another $30 million of securities sales the same day it released Q3 earnings. This latest preferred offering comes after Canaan closed the third tranche of additional preferred shares for $50 million less than a month prior. Canaan At the end of Q3, Canaan had $71.8 million in cash and $138.2 million in prepayments and other current assets. There was $186.3 million in total liabilities - 81% of which were current with $77 million of that being convertible preferred shares. Canaan The company does have a fairly large BTC stack at 1,212 million coins. That hoard has a market value of $114 million at a $94k BTC price per coin. However, 730 million of those coins are not directly held and thus introduce counterparty risk into the equation. Closing Thoughts If we think about this from the perspective of the market, six-figure Bitcoin is going to probably generate headlines in the broad media landscape. Those headlines may trigger a renewed interest in the cryptocurrency market from the larger public. Higher BTC prices inevitably make the economics of mining more viable. And mining profitability generally strengthens the incentive to mine whether the 'gold' is physical or digital. The point is, as long as Michael Saylor's ' infinite money glitch ' positive feedback loop keeps pushing BTC prices higher, I think there is a realistic scenario where CAN shares can have a run again provided the market starts sniffing out increased machine sales before the revenue is disclosed in Canaan's earnings. But to be clear, I don't think this company is a great long-term investment by any stretch. But as a speculative swing trade with $100k BTC as a primary catalyst, it might be worth a shot at $1.70 per share. I have a small position in CAN that I expect to hold for the next few months. I do not anticipate the share price will get remotely close to revisiting previous cycle highs. I'll reiterate the 'hold' call.