CleanSpark, Inc.: Positive Outlook And Reevaluation Of Expectations

Summary

• The estimation I came up with in August was highly speculative, however, now there are more concrete details to increase the accuracy of my predictions.
• While shorts have attempted to undermine the company’s success, real world actions prove contradictory to the views in these reports.
• Regardless of high valuations and economic uncertainty, the company is continuing to grow and this will provide value to shareholders.
• My former minimum 2035 growth estimate was for at least 1000%, now it has increased to 1800%.

Introduction

Yes, the company is speculative. Yes, the company has its risks. Yes, the valuation is high right now. Yet, I view the company as far less risky, speculative, and/or overpriced than many. This article is a follow up to my previous publication in August 2020, and will attempt to bolster the argument that was laid down in that piece with updated financials and company news.Chart 1: An overview of the stock performance of two high-growth and innovative companies, CleanSpark and Tesla (TSLA). In my former article, I used this chart to compare how both companies were seen as overvalued at the time. However, I knew that CleanSpark still had boundless growth ahead.

Chart 2: As shown in this chart, those who believed that prices were too high in August were quite wrong, with incredible returns still seen for both companies. Of course, the past 2 months show investors struggling to continue their hold at such high values.

As a quick summary of my previous article for those of you who may not have read it, I base my investment thesis on the company as a very long term, buy and hold company. If you are new to the company, CleanSpark, Inc. (NASDAQ:CLSK) is a diversified company that has their main focus on producing microgrid solutions. Microgrids are an aspect of the renewable energy field as a way to use software or AI to monitor all forms of power inflow/outflow/production at a singular location automatically.

This allows for economic and efficiency optimization at a higher level than human monitoring can provide. One of the first contracts of the company was based at USMC base Camp Pendleton, where CLSK provided a diverse microgrid system of multiple separate grid islands that all work in unison to maintain energy flow at military grade security and stability. Now the company has contracts with multiple developers worldwide producing commercial grade microgrid solutions. Many short reports deem these contracts as baseless, yet revenues are being seen and progress is continuing to go forward. Microgrids are an innovative new field where any information is highly coveted to prevent competitive advantage. As such, we must look at the financials to determine the health of the company.

As a small company in a young industry, the current revenues are very low, about $10 million for 2020, and trades at a price/share ratio of nearly 30 and FWD P/E of 180. Even with such a valuation, I do not trade on a short-term basis, and merely continue to add to my positions slowly. Using the company provided revenue growth estimates, my former article estimated that by 2035, the stock's price should increase at least 1400% and have a conservative max increase of 14000%. Since that point over 6 months ago, new catalysts have given rise to a higher rate of revenue growth. First, let us take a look at these catalysts and determine how we can incorporate them into the analysis.

Introducing, mVoult: a Residential Microgrid Unit

One of the primary concerns of shorts is that the company does not sell physical objects and is merely a scheme to benefit from green investments. However, as seen with the recent release of mVoult, the company is now taking steps to bring their products direct to residential consumers. mVoult is a residential microgrid controller that can be applied to existing or new infrastructure and is able to protect the customers' access to the grid, batteries, or production sources. The technology that Camp Pendleton utilizes is now soon-to-be accessible for the masses. This is especially pertinent in regard to what recently occurred in Texas. Also, now that consumers will have access to the company's products, a wave of review and insight will emerge into whether this company is the real deal.

I had stated in my previous article that the company was not looking to enter the consumer market at the time, yet would be an important area of growth in the future. Now, the company has developed a consumer item at a rapid pace, and will start taking orders in spring 2021. Soon thereafter, investors will be able to measure more easily the performance of CleanSpark, since commercial contracts are tight-lipped and secretive. It will be nearly impossible to hide faulty products from consumers. With convincing performance and positive review, I will expect investors to feel more at ease with the company and continue to purchase equity.

Image 1: The mVoult system as presented on the new website.

In order to distribute and produce the mVoult system, CleanSpark has just completed the acquisition of Solar Watt Solutions, Inc., a Southern California based solar and alternative energy company. CEO Zach Bradford praises the company as an essential partner for the past year, and that acquiring them is an important step for continued growth. According to CFO Lori Love, "this acquisition brings a significant pipeline to drive strong revenue growth immediately as part of our new residential initiative[…] We anticipate that the acquisition will contribute approximately $20 million in revenue over the next 12 to 18 months." I assume this $20 million in revenues is coming sooner than estimated last year by the company, as the old forecasts showed only $20 million of revenues for the entire year of 2020. With their recent Bitcoin mining endeavor, the company is already expecting an additional $100 million per year from that field at peak production levels.

Bitcoin Side Hustle Becomes Major Revenue Path

In late 2020, CLSK acquired an Atlanta based data center and bitcoin mining operation, ATL Data Center, in order to benefit from this new asset class. Bitcoin has seen tremendous growth over the last year with prices hovering around $8-9000 until the recent spike to $50,000 starting last winter. With only 21 days of mining in December, the company earned over 32% of their total quarter earnings via this acquisition. Moving forward CLSK will continue increasing their hash rate, and state, "given the current difficulty rates, this is expected to result in the production of 6-9 Bitcoins per day." This is an astounding value, as the company expects $115 to $150 million per year from their mining revenues at current bitcoin prices. Further, this form of income is highly profitable, with the company expecting 80%+ margins on this segment. This profitability, along with the continued sale of their modeling software, will help offset the lower margins seen in the physical controller segment.

Despite all the success CLSK has seen through the latter half of 2020, a claim circulating around is that the purchase of the bitcoin mining company was to distract from disappointing advances in the microgrid sector. I, however, find that the evidence shows that the management merely saw an opportunity that will provide beneficial long-term benefits. Diversification of revenues is always going to be a benefit to a company, especially when those revenues are from a highly profitable and low capital avenue. Additionally, the company will soon use this location to showcase the ability of renewables and microgrid solutions to provide clean and efficient bitcoin mining capabilities, an important factor for consideration of Bitcoin as an asset class.

Increased Financial Stability

As a small company, financial instability led to large swings in revenues, margins, and valuations. However, with the new diversification into bitcoin mining and acquisition of Solar Watt Solutions, the base revenues and profit margins will be significantly increased and allow for increased investment into their microgrid technology. I believe this allowed the company to proceed with the residential products sooner than anticipated. This quickened pace will help increase short-term revenues over the guidance provided in 2020 and reduce revenue volatility long term.

Interestingly, as shown in chart 3, profit margins were increased prior to the acquisition of ATL due to sales of their mVSO and mPulse software platforms. This increase in margins prior to the acquisition can be used as evidence against those who do not believe that CLSK is selling any products, a common claim by shorts. The company continues to see extraordinary growth with the most recent report showing a quarterly increase in revenues of about 140% from the prior year. Even with a cyclical development period by way of fewer installations in wintertime, the company is still expanding handily.

Chart 3: This chart shows profit margins, quarterly revenues, and Book Value/Share for CLSK over the past two years.

A Renewed Growth Estimation

It is great to see that the company has been improving and growing beyond expectations in 2020. By incorporating the new guidance provided in their most recent quarterly report, I can now increase my estimated growth forecast for 2035. First, I will incorporate the management expectations of generating, "in excess of $30 million in total revenue in the fiscal year ending September 30, 2021." This is an increase of $10 million from the $20 million expected for 2021 and I can use this value to update the previous calculation. Further, with anticipation of over $100 million dollars' worth of bitcoin mining by the end of the year 2021, I will add another $30 million of revenues as the hash rates rise through the year. Growth will then continue from 2022, with an estimated $160 million in revenues.

When looking back at my former article, I based the growth of the company only on the expected size of the microgrid industry, rather than extrapolating out from CLSK's current revenues. However, perhaps it is better to work forwards than backwards. Therefore, I expect that after 2022, the growth of the company should begin to plateau by 2030, with an average of 25% growth per year. Thereafter, I will incorporate 10% growth beyond that point until 2035. 25% is a conservative value for this tech based company, as the average YoY revenue growth rates are 14% as of Q4 2020. However, CLSK will have both first mover advantage and a large industry to penetrate, both of which will likely allow CLSK to beat these estimates. When extrapolated, we can see that the 2035 revenues will then be about $1.15 billion by 2035. That equals an increase in revenues of 115x and a stock price of $3,220 at the same valuation. However, if the company falls down from a P/S ratio of 30 to an average of 5.0, slightly above average for the industry, the stock price will be $536 per share. Also, you can look at the P/E ratio (FWD) falling from 180 to around 45 at this time, that would correspond to a stock price of $800.

Summary

Thanks to impressive acquisitions and progress these past few months, CLSK is now humming along at a solid clip, and will continue to provide significant gains to those who invest in the company. With the stability of bitcoin mining and impending residential microgrid unit sales, the catalyst for stable and significant revenue growth allows for a very accurate means of forecasting revenue. Accordingly, I believe that if an investor buys in at an average of $28 per share, they would see gains of between 1800% and 2400% over the next 14 years. This is an increase of 400% from my prior article's conservative measurement, and an average of 21% growth per year. To me, CLSK seems like a worthy investment, even if you believe that the company is overvalued at the moment. My advice to investors would be to slowly accumulate shares when the price declines and hang on for the ride.

It is also important to note that while volatile now, as time moves on this will decrease as revenues stabilize and consumer products are seen. Potential risks still exist down the road as civil disputes may become hindrances. While I foresee these being thrown out due to lack of merit, financial burden will still exist. Further, it is of utmost importance that the rollout of the consumer products goes smoothly and that bitcoin continues to be a viable asset class. Although, the nature of this investment will allow for those investors with the necessary risk tolerance to see worthy success down the line. I hope this article helps illustrate what a successful path entails and provides insight into the positive outcome that can be obtained.

Lastly, sorry for the delay in articles, I will now be working on some again. Thanks for reading.

Analyst’s Disclosure: I am/we are long CLSK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.