Summary Hut 8 Corp. focuses on operational advancement and energy sustainability efforts, acquiring substations to enhance mining capabilities. Despite not mirroring the price surge of its peers, Hut 8 has reported improvements in operational metrics and revenue diversification. Hut 8 holds the second-largest BTC on the balance sheet among public Bitcoin mining companies, providing flexibility for strategic monetization and exposure to Bitcoin price appreciation. I’ve covered two separate Bitcoin miners within a month. In those articles, I touched on the strategic planning and synergistic optimization of the miners going into 2024 and the scheduled Bitcoin halving event. Analyzing these factors helps us know which miner is taking advantage of diversification and expansion opportunities to maximize sales in the cyclical Bitcoin mining business. In my Cipher Mining ( CIFR ) analysis , I pointed out the miner’s strategic hardware purchases and improved hash rate. For Marathon Digital ( MARA ), I pointed out improved monthly Bitcoin production and revenue from transaction fees, among other points, and highlighted some risks related to these stocks. Overall, different miners have varying diversification approaches, expansion strategies, geographic focuses, and mining technologies, providing investors with exposure to a range of factors beyond just the price of Bitcoin. Data by YCharts This article delves into Hut 8 Corp.’s ( HUT ) operational advancement and energy sustainability efforts, particularly in acquiring substations to enhance its mining capabilities. I last wrote an article about HUT in Q3 (August) last year, when I covered highlights from its FQ2 financial results. In that analysis, I recommended a “hold” for the stock. Going into Q4, we saw how the anticipation of the spot Bitcoin ETF gave Bitcoin good momentum, and crypto-exposed stocks benefited from the positive momentum in the Bitcoin market. In Q4, COIN saw a 131% surge, MARA did 176%, and Riot Platforms ( RIOT ) surged by 65%. It's worth noting that as the long-anticipated spot Bitcoin ETF has been finally approved, there is likely to be some short-term price correction among these crypto-related stocks that had surged in anticipation of the ETF approval. While HUT saw a price surge in Q4, HUT’s gain fell short of other top miners like MARA, RIOT, and CIFR, each witnessing a triple-digit percentage surge in the spot ETF catalyzed Bitcoin momentum. Despite not mirroring the price surge of its leading peers, HUT has reported some improvements in its operational metrics, including increased mining efficiency and enhanced revenue diversification, and is well-positioned to capitalize on the imminent post-halving bull season. Latest Operations Report HUT, following the convention among Bitcoin mining firms, releases a monthly operations update, focusing on key metrics like the amount of Bitcoin produced, energy capacity, and reports on business expansion. December Production Update (Hut 8 Press Release) In December, Hut 8 recorded modest MoM changes in its operational metrics as some self-mining machines underwent temporary maintenance and repairs. Despite a flat self-mining hash rate between November and December and a slightly lower number of deployed miners, Hut 8's production of Bitcoin increased by 63 BTC MoM. The company attributes the increased production to an increase in Bitcoin network transaction fees and efficiency gains achieved through the implementation of Hut 8's proprietary software at specific mining sites. As the Bitcoin halving event approaches and block rewards (the main source of miners’ revenue) get cut in half, it becomes paramount for Bitcoin miners to enhance transaction fee revenue generation for post-halving operational viability and to offset the impact the reduction of block rewards will have on the miner’s revenue. Besides transaction fee revenue generation, HUT runs a diversified business model, offering high-performance computing ((HPC)) infrastructure and providing managed services to other Bitcoin miners. A diversified revenue stream is one of HUT’s differentiators. HUT’s acquisition of TeraGo's cloud and colocation business lines and its five data center facilities in Toronto, two years ago, has introduced a profitable high-performance computing segment into Hut 8’s portfolio. Miner BTC Balance Sheet (TheMinerMag) HUT’s Bitcoin on the balance sheet increased by 66 BTC in December. Despite having a lower self-mining hash rate compared to some of its peers, Hut 8 holds the second-largest BTC on balance among public Bitcoin mining companies. HUT currently holds 9,195 BTC, behind MARA’s 15,174 BTC and ahead of RIOT’s 7,362 BTC. With such an amount of Bitcoin held, Hut 8 has the flexibility to strategically monetize its Bitcoin holdings to generate cash flow for reinvesting in mining operations and other ventures. The Bitcoin holdings also expose Hut 8 to the potential price appreciation of Bitcoin, allowing the miner to benefit from any increase in Bitcoin’s value. Valuation Just like their primary assets, Bitcoin, mining stocks exhibit high beta; therefore they typically do not trade on traditional valuation metrics. A mining sector-specific valuation metric, like the price-to-hash (P/H) ratio, gives some insight into HUT’s valuation relative to its hash rate. The P/H ratio gives insight into how much investors are paying for each TH/s of the realized hash rate. P/H Ratio (TheMinerMag) HUT’s P/H ratio is 116.49. This means buying a share of Hut 8’s stock would mean paying Hut 8 $116.49/TH/s to mine Bitcoin. HUT’s P/H falls lower than that of several of its peers, seen in the chart above. The average P/H ratio of miners recorded in the chart above is 148.8. This means HUT is relatively undervalued in comparison to the average P/H ratio and is a good anchor for any crypto-related stock portfolio. Risks and Conclusion Volatility As emphasized in every Seeking Alpha article covering a Bitcoin miner, mining stocks possess inherent risks like volatility because they are highly influenced by the price movement of Bitcoin. As most Bitcoin-exposed stocks, including mining stocks, have surged over the months on the Bitcoin ETF news, some healthy price correction could be imminent in the short term. There could also be high beta. Dilution Unlike MARA and RIOT, known for stock issuances for fundraising, HUT shareholders face minimal dilution risks as the company hardly raises funds through stock issuances; however, HUT occasionally takes on debt and has recently amended its credit facility with Coinbase Global ( COIN ) for an extension of an additional $15 million loan. While this provides immediate capital, it also adds financial leverage and interest expenses, potentially impacting HUT's profitability and financial health. Potential Outflows Some analysts believe that with the approval of the spot Bitcoin ETF, investors could liquidate other Bitcoin-related stocks, and outflows might redirect into spot BTC ETFs. The argument is that before spot ETFs, investors in traditional markets had limited options for gaining Bitcoin exposure in traditional investment vehicles. Bitcoin miners benefited from this limitation of investment avenues, making speculative capital flow into mining stocks. However, with the introduction of spot BTC ETFs, investors seeking Bitcoin exposure can directly invest in Bitcoin through these funds, bypassing the need to invest in individual mining companies. I, however, contend that this hypothesis may not entirely materialize, as the dynamics of market behavior are subject to various influencing factors. Some investors, particularly those with a higher risk appetite and a deep understanding of the crypto industry, may prefer individual mining stocks for a more hands-on approach. Downtimes HUT’s mining operations have been plagued by downtimes in the past due to power surges . Moving forward, I expect HUT to show improvements with the addition of more power capacity. On December 31, HUT purchased a 63 MW substation in Culberson County, Texas. The company has also recently received approval to proceed with its mining operations plan in connection with the Celsius bankruptcy proceedings. In conclusion, Hut 8's strategic focus on operational advancements, energy sustainability, diversified revenue streams, and its substantial Bitcoin holdings positions it as a potential top-gainer in the imminent post-halving Bitcoin bull market.
