CleanSpark: Why The Shorts Have Got It Wrong

Summary CleanSpark is a bitcoin mining company that hasn’t appreciated at the rate of other bitcoin or crypto-related stocks in the short term, such as MicroStrategy Inc. or Coinbase. The % short float for CleanSpark is at 31% of their shares outstanding. Dilution, combined with this excessive shorting, has spooked retail investors. A major catalyst for CleanSpark will be their guidance for Q4 earnings as they have been HODLing a significant number of bitcoins where the appreciation in price will eventually show. CleanSpark is one of the few miners that has scale and is also very cost-efficient, thus making it the best mining investment opportunity on the market. I have a Strong Buy rating for CleanSpark with an expected price target of $45 by Q3 2025 earnings, based on my modelling for future revenue and earnings. CleanSpark (CLSK) is one of the many bitcoin miners that should have seen major appreciation in its stock value as Bitcoin almost reached a new high of $100,000. The stock price is up nearly 40% year to date; however, it has been tepid recently with the price being down by around 15% over the last six months whilst bitcoin experienced a steep rise. It is one of the most efficient miners and has been holding all of its bitcoin to maximize shareholder value. My analysis below will explain the macro cycle for bitcoin; why CleanSpark is lagging; and how much upside there is to the stock price over the coming quarters. This will be based on the future expected earnings, which I have forecasted based on some reasonable assumptions. The macro cycle The main influencer of the value of mining companies holding Bitcoin, including CleanSpark is the future-expected price of bitcoin. Bitcoin correlates very closely with global liquidity or the money supply (M2) and has been on a growing trend since the start of 2023. The chart below shows the % change in price of bitcoin against the % change in M2, which shows this strong relationship between the two over the last decade. Bitcoin Is Data This current liquidity cycle is only at the mid-cycle stage, and there is plenty of upside left going into 2025. The peak price of bitcoin this cycle is anyone’s guess, although the CEO of CleanSpark predicted a peak under $200,000 towards the end of 2025. Based on the chart, there is plenty of upside left if you consider the previous cycle tops. It is also likely that global liquidity will continue to improve as the fed eases monetary policy and the PBOC are being advised to inject stronger stimulus to achieve their economic growth targets. From a technical perspective, the trend for bitcoin is up as the 50 MA (blue line) exceeded the 200 MA (orange line) in late October, which signifies a ‘golden cross’. The golden cross is a bullish chart pattern that shows a positive longer-term trend of an asset. There may be mild corrections as it appreciates, but the overall trend will likely continue to go up, which will be reflected in CleanSpark’s balance sheet. Yahoo finance Why CleanSpark is lagging The key question is why the price of CleanSpark is lagging when the price of Bitcoin has been appreciating and whilst the indicators for Bitcoin appear to be on a positive trend. I think there are two reasons for this. The first is that the appreciation in the price of bitcoin will not show up in the balance sheet for the Q4 earnings. The fair value accounting of bitcoin miners is such that the upcoming reporting quarter will assess the price difference of bitcoin at the end of September against the end of June, where the price change has been flat. This is all whilst the cost of mining has appreciated due to the increase in the network hashrate or difficulty. This results in a poor outlook for miners with the HODL value, and revenue not seeing appreciation whilst the costs of mining have. The appreciation of bitcoin will only show up in the balance sheet for the Q1 2025 earnings, which will track the price change at the end of December against the end of September. I believe the market makers are taking advantage of the poor sentiment this quarter. The second reason is the market manipulation by institutions who have been shorting CleanSpark based on its current outlook. Calculated by Author using information from MarketBeat and CleanSpark investor relations The chart shows that the short interest for CleanSpark has increased significantly over the past quarter to 22%, as reported by NASDAQ. Fintel shows that figure at 31% once you include the off-exchange short volume, which is primarily held by institutional investors. It almost seems counterintuitive that institutions are shorting CleanSpark at a time when the price of bitcoin continues to appreciate. This has resulted in retail investors foregoing CleanSpark for other crypto investment plays. However, that is unlikely to unfold once the appreciation of bitcoin shows up in the balance sheet of CleanSpark resulting in record earnings and a potential short squeeze in the near term. The other most common argument for why CleanSpark is down is the rate of dilution, but I will explain below in the valuation section why dilution is necessary and is actually beneficial for shareholders. How CleanSpark compares to other miners Before I discuss the valuation, I think it would be useful to compare how CleanSpark performs against other miners. The two most important factors to assess are scale and the efficiency of their operations. Below I’ve included a few key metrics that I track to compare miners, which shows that CleanSpark is one of the few miners that can achieve efficiency at scale. The first metric I track is the scale of mining operations and the size of bitcoin holdings (the HODL). It is only the miners that hold large amounts of bitcoins that will see significant improvement in their balance sheet as the price of bitcoin continues to appreciate. I will explain the significance of this in the valuation section. Compass Mining and Power Mining Analysis CleanSpark is the fourth-largest miner in terms of its holding for Bitcoin as of October 2024, which will only continue to improve as they improve their hashrate. TheMinerMag The second chart shows the estimated cost incurred by a mining company to operate and maintain 1 petahash per second (PH/s) of computing power. This, for example, would include hardware, electricity, overheads, and maintenance costs, but excludes depreciation of assets and stock-based compensation. The metric shows how cost-efficient a miner is because as the difficulty increases, companies need more PH/s to mine a single bitcoin. CleanSpark ranks very well across this metric to its peers, with a very low $/PH/s. One of the reasons for this is because they have updated their fleets and have purchased several S21 Bitmain miners to improve fleet efficiency, but are also able to leverage fixed costs across their mining rigs with their economies of scale. Compass Mining and Power Mining Analysis Another reason CleanSpark is cost-efficient is due to how reliable their infrastructure is. The chart above measures utilization, which is how long the mining equipment is consistently active. CleanSpark is the second most efficient miner in October, which means they are able to mine more coins a month and have less downtime due to equipment failure or maintenance. This is a sign of a very well-run company. Valuation I have a Strong Buy rating on CleanSpark based on its top-line growth in earnings over the next 9 months. My base case price target for the stock is $45, which represents roughly a 3x from where the stock price sits today. The range for the stock price is large, which is primarily influenced by the future expected price of bitcoin. My analysis forecasts net profit/losses for the upcoming earnings - Q4 2024 (covering July to September) to Q3 2025 (April to June) depending on the prevailing price of bitcoin and then the P/E multiple ratio for CleanSpark. I’ll start by explaining the key inputs and assumptions before explaining in detail how I calculated the earnings for each quarter. Calculated by Author using own assumptions and information in CleanSpark investor relations. The number of shares outstanding was at 228 million at the end of Q2 2024 and currently sits at 253 million. My analysis assumes that dilution increases at a rate of 11% per quarter, based on the dilution rate of previous quarters. This could be higher or lower depending on how aggressively management pursues acquisitions and increases the hashrate. The expected price of bitcoin is anyone’s guess, but I’ve chosen a relatively flat rate for the bear case which assumes that the bitcoin price is near peaking, and a target of $150k for the base, and $225k for the bull. These plug-in values could be different, but I thought they were reasonable estimates. For the bear case, some may expect a sharp depreciation in the price of bitcoin, but I think this is very unlikely due to the positive trend I explained earlier. My chosen PE multiple is between 10 and 30 based on what a reasonable multiple would be for a mining company that is operating profitably. The PE multiple affects the target stock price, but not as much as the price of bitcoin. The improvements in fleet efficiency is based on how much additional hashrate is acquired between each quarter and assuming CleanSpark will only add the most efficient equipment such as S21 XP which operates at 13J/THs . CleanSpark’s projected hashrate improvements is based on their investor relations, where they suggested they could achieve 37 EH/s by the year-end and are targeting 50 EH/s by the end of next year. My analysis assumes the ramp is steady and gets to 43 EH/s by June 2025 with an average of 41 EH/s for Q3 2025 earnings. The network hashrate or bitcoin difficulty is not straightforward to predict. My model assumes that network hashrate grows at a rate of 7% per month or 23% per quarter. This is based on the increase in recent months whilst bitcoin has appreciated. The % increase for Q4 is 18% as it takes the average of October, November (which are already known) and assuming a higher hashrate of 790 EH/s in December. The bitcoin mined is calculated using the average hashrate divided by the network hashrate against the total available coins mined a day, and assuming a utilization of around 98%. My analysis is conservative for the network hashrate estimate, as CleanSpark’s hashrate doesn’t increase at the same rate, resulting in fewer coins mined in the Q2 and Q3 2025 earnings period. The cost to mine only covers the mining cost and excludes all other costs, including overheads and depreciation. This is calculated using an extrapolation of the cost to mine in CleanSpark's Q1 investor presentation . My analysis extrapolates the cost to mine for each month and quarter using the table below, and using my input values for network hashrate and fleet efficiency. CleanSpark Investor relations So now, with the key assumptions aside, I will explain how I derived net earnings for each quarter for the base case. Calculated by Author using own assumptions and information in CleanSpark investor relations. The table shows the forecasted revenue and expenses for each quarter. I included Q3 2024 earnings to help demonstrate how I calculated future quarters. The analysis shows significantly higher profits from the Q1 2025 earnings period. The bitcoin mining revenue is calculated by multiplying the bitcoin mined each quarter by the average price of bitcoin across the quarter. For example, for the Q4 2024 earnings, this would be 1465 x $61k = $89 million. Likewise, the cost of revenue can be calculated by multiplying 1465 x $33k = $54 million. The price increase in bitcoin results in higher revenue each quarter. For ‘other income,’ I extrapolated the interest income and expense but removed the unrealized gain or losses on derivative security incurred in Q3 2024. For 'other costs' which include professional fees, payroll expenses, and general admin expenses, I extrapolated an increase in payroll expenses and general admin expenses based on previous quarter-over-quarter increases. I assumed a flat rate for professional fees and excluded the one-off impairment expense reported in the 2024 Q3 earnings for writing off old inefficient mining equipment. Calculating the fair value gain/loss of bitcoin requires multiplying the value of bitcoin at the end of the quarter by the HODL and subtracting the mining revenue and the value of the HODL in the previous quarter. For Q4 2024, the sum is (8049 x $63k) – $89 million - $104 million = $8 million. It is important to depict that the fair value gain/loss is recorded as an expense, but this is a negative expense in quarters where the value of the HODL has appreciated. This results in overall costs being negative for CleanSpark in Q1 2025 onwards. Furthermore, the rate of appreciation in the HODL far outweighs the rate of increase in dilution. My analysis suggests that the value of the HODL will increase by around 250%, which will far outpace dilution. This means that the management's decision to equity finance expansions over selling the HODL will result in significantly more value to shareholders. Lastly, the depreciation of assets was kept flat, although it may increase with more infrastructure and rigs coming online. The income tax was calculated based on expected earnings in each quarter. Conclusion CleanSpark offers a great opportunity within the bitcoin mining sector for the patient investor. Whilst the stock price has underperformed in the short term, primarily due to dilution, shorting, and the timing of bitcoin's fair value accounting, this correction is only temporary. As global liquidity increases and the price of bitcoin continues its upward trend, CleanSpark's balance sheet is expected to reflect substantial appreciation, particularly from the Q1 2025 earnings. This alongside its competitive advantages in cost efficiency suggests a robust earnings growth and potential short squeeze in the near term.