Digihost Technology: Bitcoin Miner With Strong Growth And Catalysts Into 2022
- Digihost Technologies released a production update for Q3 where the company was able to mine 133 bitcoins.
- The company's production capacity is expected to significantly increase through 2022 with the delivery and deployment of new mining machines.
- Management is moving forward with an effort to list shares on Nasdaq from its current OTC and Canadian listing share structure.
- We are bullish on Digihost which is well-positioned to benefit from climbing bitcoin prices.
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Digihost Technology Inc. (HSSHF) operates as a bitcoin miner which is an exciting segment supported by the ongoing bull market in cryptocurrencies with bitcoin (BTC-USD) pricing significantly higher over the past. While Digihost is not the largest or most recognized name in the industry, recent updates highlight an impressive growth story and positive outlook as the company increases bitcoin production capacity. We are bullish on HSSHF which trades at an attractive valuation against its peer group with significant upside potential. An effort by the company to list shares on NASDAQ from its current primary listing in Canada and over-the-counter share structure can represent a positive catalyst for the stock with new exposure.
What Does Digihost Do?
Digihost just released a production report for the Q3 where it generated 133.02 bitcoins, up 20% from 109.97 in Q2. Part of this increase was driven by a lower network difficultly level in early July when China banned bitcoin mining forcing significant global capacity to go offline, effectively giving Digihost a greater share of the global hash rate. With an average bitcoin price of around $44k in Q3, the market value of the production represents $5.8 million in revenue compared to $3.9 million in Q2 when the average bitcoin price was $35k. Notably, at the current bitcoin market price of $50k per BTC, Digihost's Q3 production level represents $6.7 million in potential quarterly revenue and a $26.6 million annualized run rate.
Another important update from Digihost is that the company maintains a solid balance sheet position of digital asses totaling $22.9 million. This includes 452.24 BTC along with a separate and smaller holding of Ethereum (ETH-USD). At the end of the quarter, Digihost also held $17.2 million in cash for a total liquidity position of $40.1 million. From the Q2 earnings report, the company last held approximately $4 million in long-term debt meaning the Digihost is net cash.
In terms of production, Digihost has been able to achieve these operating results with a current hash rate mining capacity of 200 PH/s. The attraction here is the company's significant efforts to expand capacity from the purchase of new mining machines this year. Management is guiding for a hash rate between 925PH/s and 1.1EH/s (1,100 PHs) by the end of this year, nearly 5x from the current level. In this regard, the next few months are expected to see a significant boost to bitcoin production levels. The target is to have 1.5 EH/s capacity by the end of Q1 2022 with plans for further expansion to 3.6 EH/s through the first half of next year.
A Compelling Valuation
The metrics above are very compelling in the context of Digihost's current valuation and $125 million market cap. If we go with the 1.0 EH/s mid-point hash rate guidance for the end of this year, we can estimate that the company will be controlling about 0.67% of the global network hash rate at the current network difficultly level of ~150 EH/s.
For simplicity purposes, let's assume the network difficulty climbs to 200EH/s by the end of this year, meaning Digihost's share would be a smaller 0.5%. At this level, Digihost would be mining approximately 137 BTC per month, representing an annualized revenue run rate of $82 million as a conservative estimate at a BTC price of $50k. The calculation assumes 52,560 blocks are awarded over an entire year by the bitcoin protocol and each block represents 6.25 BTC with Digihost capturing about 0.5% of the daily network reward. In other words, we're expecting growth of at least 264% from the monthly July result when the company mined 37.7 BTC.
By this measure, we can say that Digihost is currently trading a forward price to sales ratio of just 1.5x on our forecasted $82 million as an annualized run rate by the end of this year. If we also net out the cash and digital assets position, Digihost is trading at under 1.0x. In our view, this is simply too cheap to ignore in the context of the growth momentum, positive outlook for crypto, and the company's overall solid fundamentals.
For context, Marathon Digital Holdings Inc (MARA) recognized as the largest bitcoin miner by market cap expects to reach 8 EH/s in hash rate capacity by the end of this year. Going through the same potential BTC production and revenue exercise, we arrive at an annualized revenue run rate for MARA by the end of this year at $658 million against the company's current $3.6 billion market cap. This implies MARA is trading at a forward price to sales multiple of 5.5x. Even taking the maximum forecasted future hash rate capacity for MARA which is 13.3 EH/s by mid-2022, the company could theoretically generate an annualized revenue run rate of $1.1 billion implying a forward-price to sales multiple of about 3.3x out towards 2023, double our calculated Digihost end of 2021 annualized run rate multiple of 1.5x.
Commitment to Crypto Climate Accord
The other side to the equation is the costs and operating expenses. For Digihost, with earnings data for Q2, the company reported total operating expenses of $4.1 million. The final Q3 financials will provide a better picture of the current cost structure. Still, with an expectation that the company is on track to generate over $7 million per month by the end of the year, there is clear visibility towards profitability in 2022 as it begins to benefit from scale.
Part of the growth strategy from Digihost is to secure low-cost and renewable hosting sites. In March, the company announced the acquisition of a 60MW power plant in the state of New York, in a $4.3 million deal. The facility expands Digihost's power capacity to 102MW while reducing the all-in cost of electricity to under US$0.03 per kw/h, an exceptional rate among any miner.
While this newest facility is powered by natural gas, Digihost is committed to renewable energy and utilizing renewable energy certificates to mitigate its carbon footprint. Indeed, Digihost is a signee of the "Crypto Climate Accord" which envisions an industry goal of achieving net-zero emissions by 2030.
Digihost Uplisting to NASDAQ
The point here is not necessarily to arrive at the exact future revenue and earnings figure but simply to illustrate the deep valuation discount in shares of HSSHF against MARA and other bitcoin mining peers. We sense that the company's smaller scale and slower production ramp-up compared to some of the larger players has kept it unjustifiably undervalued.
The good news is that Digihost is taking steps to enhance its profile. To gain eligibility for a NASDAQ listing with a minimum price requirement, the company has announced a 3-1 "share consolidation", essentially a reverse split. From a current 75.1 million outstanding common shares, the move will result in approximately $25.0 million shares post-consolidation. At the current stock price of $1.64, the new stock price would be $4.92, fulfilling a NASDAQ requirement for a minimum share price. Note that this move is still subject to NASDAQ approval. From the press release:
“A key aspect of our Company’s growth strategy is to provide our investors with greater liquidity through the listing of its shares on an internationally recognized stock exchange. Uplisting the Company’s shares from the OTC market to Nasdaq will also provide the Company with broader access to capital and institutional recognition. The Company’s current financial position presents the opportunity to accelerate the plan for meeting the listing requirements of the Nasdaq by consolidating the Company’s shares.”
We believe an eventual uplisting will be positive for the stock by not only raising its profile and adding a measure of credibility to the business but also opening the door for a new class of shareholders that may previously overlook OTC stocks.
HSSHF Stock Forecast
Digihost Technologies checks off all the boxes of what makes a high-quality bitcoin miner. We like the production growth outlook, the company-owned power plant, efforts towards clean energy, and the solid balance sheet. In our view, everything is in place for the company to benefit from a trend higher in bitcoin prices allowing it to outperform the industry given its low valuation.
The bullish case is that a future NASDAQ listing will allow HSSHF to narrow its valuation spread relative to larger bitcoin mining peers. We rate HSSHF as a buy with a price target of $3.30 representing a 3x forward price to sales multiple on our estimated annualized bitcoin production capacity by the end of this year, and a fair market value closer to $250 million.
The main risk continues to be the price of bitcoin, with sustained declining likely pressuring the company's long-term earnings outlook while pressuring shares lower through lower sentiment. Other monitoring points include regulatory aspects of not only bitcoin as a cryptocurrency but also the bitcoin mining industry. Considering the company's micro-cap profile, the understanding here is that any position in shares of Digihost is high risk and exposed to wide swings of volatility.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of HSSHF, MARA, BTC-USD, ETH-USD either through stock ownership, options, or other derivatives. 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.
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