Summary CleanSpark's financial history shows significant revenue growth but persistent negative cash flows that require share dilution. The business model of BTC mining involves high capex and constant equipment upgrades, making it difficult to achieve positive cash flows. Management's hope to return capital to shareholders hinges on improving cash flows, but current financials and market conditions make this challenging. Despite potential upside from BTC price increases, risks from dilution, energy costs, and missed opportunities in AI data centers make it hard to rate a Buy. CleanSpark ( CLSK ) is a Bitcoin ( BTC-USD ) mining company that came out with Q1 FY 2025 results not long ago. Despite promising gains in the stock in the immediate aftermath of the 2024 election, the price has suffered into 2025 but rallied this week. CLSK Recent Price History (Seeking Alpha) I'm not surprised the honeymoon of the election was short-lived, as the financial history isn't impressive, and the competitive nature of the business makes it hard to recover invested cash. While this could change if BTC takes off, threats of dilution and continual cost increases likely mitigate the upside. Brief Financial History This miner has really taken off over the last five years. With fiscal years ending September, we see revenue up several multiples since 2020. Author's display of 10K data It's a lot of growth, but the concern here is the impact to the cash flows. Author's display of 10K data Seen above free cash flow has not grown as the business has. With only one years of slightly positive results in 2022, it's mostly been a cash burner. If we adjust for outflows from M&A, it's an even starker picture. Author's display of 10K data To finance all of this, the company has had to sell several more shares, resulting in significant dilution during its lifetime. Balance Sheet (Q1 FY 2025 Form 10Q) While they didn't utilize debt too much in the past, this sort of changed in the first quarter, with almost $600M in debt added to the balance sheet. Q1 FY 2025 Form 10Q Of course, it's convertible debt due in June 2030. As such, there's a good chance it will be converted if the cash flow situation improves. We might then ask why that has not been the case up to this point. Business Model As a BTC mining company, CLSK makes money by operating BTC miners, cryptographic machines that "solve blocks" to earn BTC rewards. They have multiple sites in different states to perform this role. The BTC they earn from mining can then be sold on the open market, in order to generate revenue for their business. February 2025 Company Presentation BTC mining companies are known to be cash burners, and CleanSpark is no exception in this regard. This owes to the fact that miners don't remain useful assets for terribly long. Cash Flow Statement (Q1 FY 2025 Form 10Q) Looking at the cash flow statement, we see that most of the capex is investment in the miners. Even if operating cash flows could run positive, these are quite expensive, and their outflows would need to be overcome in order to generate positive cash flow. They explain this cost in their latest Form 10K : Additionally, as technology evolves, we may be required to acquire newer models of miners to remain competitive in the market. This upgrading process requires substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis. That's the crux of it there. Mining companies can continue to scale out, but their miners regularly require replacement, and this is expensive to do. This owes to how BTC mining works. Participants must compete for hash rate in order to solve blocks. The more that the global hash rate increases (see below), the more resources are required to stay competitive. Growth of Hash Rates over Time (ycharts.com) This means that a BTC mining company's capex is caught up in a never-ending arms race. This isn't helped by the BTC halving events, which cuts the total rewards earned in half each time it occurs, forever . February 2025 Company Presentation The slide above shows how much the halving that occurred last April reduced production, in spite of their continual capital investments in mining infrastructure. BTC 1Y Price History (Seeking Alpha) This can be mitigated if the price of BTC rises to offset the decrease in rewards, but it hasn't doubled since the halving a year ago. Even if it did, that wouldn't enough revenue to finance the acquisition of miners. It's not surprising, then, that the convertible notes were issued. Future Outlook Management had some interesting words during the Q1 earnings call . Namely, there was talk about returns to shareholders. CEO Zach Bradford explained this as part of the purpose behind the convertible notes: As you are aware, we issued a $650 million convertible note transaction, which we closed on December 17. The industry's only zero percent coupon, 100% up with stock buyback. With the net proceeds, we purchased a half call, which made the effective conversion premium 100% or $24.66 a share, and we bought back approximately 11.8 million shares of our stock. The stock purchase is reflected as treasury stock and our total outstanding shares have decreased as a result. CFO Gary Vecchiarelli later added: And I think that we would love to look to return capital to shareholders. But most importantly, we got to shore up the balance sheet, which, again, is extremely healthy, right? And as we increase our cash flows, it's just going to provide us more optionality as to whether we reinvest in the business because the ROI is greater there or if that means that we need to return capital to shareholders through a stock buyback or some other means, and that's the best use of capital. In other words, there's a genuine hope that they can return cash to shareholders, but they seem to be telling us that it's wishful thinking until the cash flows can be increased (for CleanSpark's purposes, they actually need to become positive). Using some of the proceeds of the convertible notes for a buyback is difficult to understand when there's no free cash flow to give CLSK intrinsic value. February 2025 Company Presentation CleanSpark boasts its improved energy efficiency, as part of its efforts to reduce costs and make those cash flows positive. Other mining companies, which had been building out their electrical capacity for BTC mining, have started to leverage these assets for use by AI data centers being built in proximity to these miners. Why? Because there's money in AI, and it doesn't require the same type of continual capex as a miner to do this. While this may seem like a miraculous way out for an industry known to burn cash, CleanSpark has made the curious decision to stay out of it, with Bradford explaining in the call: While some of our industry have pursued a speculative approach to HPC, repurposing a Bitcoin mining facility for high-performance computing is far more complex than it may appear. These deployments require extensive customization, integration and optimization, not just at the hardware level, but also across software and physical infrastructure to meet the increasingly sophisticated demands of AI and enterprise computing. He even mentioned that he believes other miners doing this will make CleanSpark more competitive and enjoy better operating results from its mining. While this would likely be true, the simple fact of the matter is that BTC still needs to appreciate significantly before the cash flows turn stable. Q1 FY 2025 Form 10Q It is fair to consider that their own BTC position has grown as they retain more on their book. Technically, this could be liquidated and increase their cash flow. Speculative asset that BTC still is, this isn't without some risk, and with lower BTC prices recently than at the end of fiscal Q1, it can go as quickly as it comes. There remains a possibility that the price of BTC increases significantly if the Trump Administration acts more boldly to establish a BTC reserve and if the asset undergoes more mainstream adoption. This is the case for upside for the likes of CLSK and the potential for free cash flow to turn positive, potentially reaching $100M to $200M. At the same time, until that happens, more dilution or convertible debt (which is delayed dilution) is possible. The potential upside from the rise of BTC can be neutralized by dilution.seen Despite the energy efficiency, there's also some cyclical risk here, with the potential for costs to increase if energy becomes more scarce. Trump's tariffs against Canada is risk a factor here to consider, evidenced by the recent scuffle with Ontario . Other external factors can always hurt supply and make energy more expensive, which would be harmful to any mining company. Conclusion $2 billion isn't a bad market cap for a CleanSpark that can turn these cash flows positive, but there's little to protect from the downside of dilution and energy costs. This suggests CLSK is fairly valued. With the revenue opportunity of contracting their electrical capacity to AI data centers missed, it's really an all-or-nothing bet on BTC mining, something that currently depends on a lot of what-ifs. It can work out on paper, but there's just not a risk-reward asymmetry here that favors buyers, and that's why I give it a Hold.
