Soluna Holdings (NASDAQ:SLNH) was previously known as Mechanical Technology (MKTY) and last covered by Kingdom Capital in this fantastic article. Historically, Mechanical Technology was an instruments business in the test and measurement space; however, they have recently transformed into a green / zero-carbon computing cryptocurrency mining company which was accelerated by the merger with Soluna Computing.
Don't know what green computing is?
No worries, neither did I at the start of 2021 - that is the fun part about being a portfolio manager, your job is to constantly process data and learn new things in order to bring it all together in a meaningful way that allows you to invest with conviction.
In short, what SLNH does is utilize excess renewable energy from wind and solar farms to power data centers specializing in performing batchable computing, which is a method of running high-volume, repetitive data processes. Currently, this computing power is being utilized to mine bitcoin, but in the future, it could be used for a variety of other things that may actually be even more profitable than mining bitcoin. For example, Soluna can currently offer batchable computing with rates as low as 25% of what customers currently pay to Amazon Web Services - AWS.
This 4-minute video with the CEO of Soluna Holding, Michael Toporek, provides a fantastic overview of how Soluna is revolutionizing how green energy is built going forward and why he believes Soluna will be a multi-billion dollar company. Most renewable energy power plants in the world have nearly 30% of their power go wasted each year. Soluna builds on-site scalable data centers that will consume every single MW of energy that currently goes wasted. It's an elegant solution to a real problem that provides Soluna an incredible profit margin while also saving the renewable energy power plant an incredible amount of money. Mr. Toporek had a great way of explaining it:
"Imagine a hotel room where every single room is filled every single minute."
With a cost of $0.023 per KwH, SLNH can survive a large drop in bitcoin, because as mining bitcoin becomes unprofitable for other miners, the network difficulty will decrease, allowing SLNH to continue to profitably mine bitcoin due to their extremely low power costs compared to their competitors. The global average dollar cost per KwH is around $0.05 (more than double that of SLNH). Furthermore, I expect announcements in 2022 of contracts that will diversify the company away from bitcoin mining while providing similar margins.
One thing to note is that, unlike most other bitcoin miners, SLNH does not keep the bitcoins they mine. They sell them immediately which, in my opinion, is a much better business model. If someone wants to speculate on bitcoin, they can buy bitcoin. Why muddle the business model by forcing investors to like both the business and the future expectations of bitcoin pricing?
Thanks to the merger with Soluna Computing, SLNH now has the potential to expand from the current 50MW to at least 350MW, but that pipeline will likely double by the end of 2022. Per the referenced release, SLNH expects to have 100MW operational by the end of Q2, 2022 and 233MW energized and operational by the end of 2022. Therefore, capital, in addition to cash flow, is needed to bring on the full pipeline of current projects, a pipeline that will only continue to grow over time.
How does Soluna get the necessary capital to scale the business going forward?
SLNH recently announced that they have received a letter of intent to acquire the instrument business from a strategic buyer in the test and measurement space. DOMO Capital views this as an extremely positive development that should net the company tens of millions of dollars. Additionally, SLNH recently announced a mixed shelf which may have given investors pause over potential dilution, but another announcement regarding a preferred share offering (in addition to the announced sale of the instrument business) has substantially reduced the risk of any meaningful or material dilution. The preferred shares are not convertible to common shares and can simply be thought of as a bond with an annualized 9% coupon.
DOMO Capital believes that at this point, no further common shares need to be sold into the market to raise funds and that the remaining amount needed to accelerate the build-out can be financed.
If SLNH is generating over $40M in annualized cash contribution margins by the end of Q1 then they should be generating nearly $200M in annualized cash contribution margins by the end of 2022 as long as bitcoin remains near $45,000. The 233MW of energy should result in computing power of at least 4.5 EH/s but depending on the type of miners that are installed this could near 5 to 6 EH/s.
The $40M in annualized cash contribution includes 300 PH/s of hosting which only has about a 35% margin vs over 70% on the prop mining; therefore each additional EH/s of computing power would generate more than just $40M in annualized cash contribution margins given the same assumptions.
With a current enterprise value of $150M, it is safe to say that SLNH is a very, very deep value play.
Using Riot Blockchain, Inc. (RIOT) as an example, RIOT currently has an enterprise value of just over $2.7B with current computer power of just 3 EH/s. If SLNH is at 4 to 6 EH/s by the end of 2022, why wouldn't they be valued at over $1B to $2B while generating over $200M in annualized cash contribution margin?
Certainly, at a minimum, SLNH should have an EV of at least $1B if the market gains any sort of comfort level that they can achieve their operations goals. Given management's track record of hitting all of their objectives in 2021 despite a challenging year in regards to supply chain, I have no doubt that they can get it done, nor would a short delay change their ultimate valuation.
How many companies can be purchased right now for 25% less than their expected annualized cash contribution margin 1 year out?
At DOMO Capital we typically seek out companies that are trading at a discount to their historical valuation based on the market's tendency to put too much importance on recent, negative, events or conditions. In the case of SLNH, the thesis is so much simpler. Nobody knows about the company, despite the incredible efforts by the CEO. I have never seen a more transparent company or CEO in my history of investing, where detailed financials are not only prepared but also presented on a monthly basis - per operating site, no less!
In any event, this is a much easier market condition to resolve, and I fully expect the enterprise value to rise above $1 billion during 2022 as more and more people discover Soluna. If the company continues to execute, then by the end of 2022, or early 2023, there is no reason why SLNH could not be a multi-billion dollar company.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of SLNH 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.
Additional disclosure: SLNH is currently one of the largest positions in the DOMO Concentrated All Cap Value Composite. More information on the composite can be found at our website. DOMO Capital Management, LLC ("DOMO") is a state registered investment adviser in CA, LA, MI, TX, and WI. Justin R. Dopierala is the President and Founder, and a registered investment adviser representative, of DOMO. Additional information about DOMO is disclosed in our Form ADV, which is available upon request. All information contained herein is for general informational purposes only and does not constitute a solicitation or an offer to provide investment advisory services in any jurisdiction. The investment strategy discussed herein may not be suitable for everyone. Investors need to review an investment strategy for their own particular situation before making any investment decision. We believe the information obtained from any third-party resources to be reliable, but we do not guarantee its accuracy, timeliness or completeness. The opinions, estimates, projections, comments on financial market trends and other information contained herein constitute our judgment and are as of the date of the material, are subject to change without notice at any time in reaction to shifting market conditions and other factors and should not be construed as personalized investment advice. DOMO has no obligation to provide any updates or changes to such information.