TeraWulf: Time To Join The WULF Pack

Summary

• TeraWulf's stock has experienced significant volatility, reaching highs of $4.04 and lows of $1.70.
• The company's vertically integrated model and cheap energy costs position it as an outperformer in the BTC mining industry.
• TeraWulf's high SG&A and potential dilution are risks to be aware of, but the company has stated it will only dilute if it is accretive.

adventtr

When I last covered TeraWulf (NASDAQ:WULF) for Seeking Alpha in late-June, the stock was trading at $1.73 per share. In the time since, WULF shareholders have taken the full round trip from $1.73 up to $4.04 and back to down to $1.70.

Data by YCharts

It's been an absolutely wild ride to say the least and at times this summer WULF was the best performing miner in the public markets. With another quarter of performance to assess and a fast approaching halving event coming in early 2024, I think it's a good time to check in on the fundamental setup for WULF to close out the year.

Q2 Earnings

In the three months ended June 2023, TeraWulf reported 35% sequential increase in revenue from $11.5 million in Q1 to $15.5 million in Q2. The company accomplished this with just a small $100k increase in cost of revenue and improved gross profit margin from 57% in Q1 to 67% in Q2.

Data by YCharts

From an opex standpoint, there was a small 3% increase in total operating expenses and the company decreased its operating loss for the second consecutive quarter:

Data by YCharts

Looking at the balance sheet, cash levels were noticeably lower from $17.0 million at the end of Q1 to just $8.2 million at the end of Q2. Total current liabilities actually increased from $56.1 million to $81.7 million sequentially:

Data by YCharts

However, total liabilities did decline from $170.5 million to $165 million quarter over quarter as the company continues to work toward paying down its debt.

Data by YCharts

Since the company is now running at 5.5 EH/s with plans to scale to 7.9 EH/s by the end of the year, TeraWulf is strongly positioned among the second tier miners by total capacity.

Profitability in Sight?

When combining the company's cost of revenue with the total opex, we can get a feel for how quickly the company could become profitable given its low energy pricing and flee efficiency:

	Q3-22	Q4-22	Q1-23	Q2-23	TTM
Cost of Revenues	$5,200,000	$5,300,000	$5,000,000	$5,100,000	$20,600,000
Total Opex	$12,100,000	$17,700,000	$15,800,000	$16,200,000	$61,800,000
BTC Mined	117	387	533	909	1,946
Breakeven Price	$147,863	$59,432	$39,024	$23,432	$42,343

Click to enlarge

Source: TeraWulf Filings

In the table above, the company's breakeven price sans interest is roughly $23.5k - which is among the lowest prices that can be observed in the public mining space. Importantly, the breakeven figure has decline each of the last three quarters. Of course, this calculation doesn't include the company's debt payment obligations. I attempted to estimate that in my last TeraWulf article. In the company's latest investor deck, TeraWulf provided an internal calculation that shows $97.8 million in annualized EBITDA at a $30k BTC price:

TeraWulf

These calculations assume both 7.9 EH/s active capacity and a network hash rate of 400 which is right around where global hash rate has been for the last 5 months:

Data by YCharts

Interestingly, TeraWulf estimates a 10% increase in global hash rate post-halving and still projects the company's marginal cost to be under $24k per coin following the block reward halving:

TeraWulf

WULF is theoretically set up far better than many of the company's higher cost peers in the public equity market. Particularly the ones with asset light models. But something else that I think might be worth considering is the possibility that global hash rate doesn't actually go up much further following the halving. At current BTC prices, many of these companies aren't going to come close to breakeven following the halving and we could ultimately see machines from weaker miners turned off entirely if the BTC price doesn't re-rate higher.

In that event, it's possible TeraWulf's share of the block reward could actually increase given the company's unit economics. While that's purely speculative on my part, I don't think it can be entirely ruled out if BTC's price remains where it is. Of course, if BTC's price does increase following the halving as it has historically, the unit economics of TeraWulf's operation could improve even with the smaller block reward.

Risks

In my last WULF article, I noted TeraWulf's high SG&A as a percentage of revenue compared to peers. While still somewhat high at 67% in Q2 compared to a few of the company's peers, TeraWulf was able to bring that expense down sequentially to $9.7 million in Q2. TeraWulf's reduction in SG&A as a percentage of revenue was more attributable to the increase in revenue than the reduction in SG&A expense itself.

Data by YCharts

Like seemingly every public Bitcoin (BTC-USD) miner, dilution is a risk for TeraWulf and that risk might be more significant if TeraWulf's debt and past actions are any indication. Of the mining equities sampled above, only CleanSpark (CLSK) has diluted shareholders to a larger degree purely from a shares outstanding perspective. However, on the last quarterly call, TeraWulf leadership was adamant that the company will not be diluting unless it is accretive. CFO Patrick Fleury said this near the end of the Q&A session:

you will never, ever, ever see us issue, you know, hundreds of millions of dollars on the ATM in a quarter.

The company's CEO Paul Prager mentioned numerous times that insiders hold a substantial portion of WULF shares and he purchased an additional 50,000 at $1.90 in mid-August.

Data by YCharts

One final risk to potentially consider is the growing short position in WULF shares. While still well below what would likely be viewed as the tier 1 public miners, TeraWulf's short percentage of shares outstanding has been edging higher than tier 2 peers in recent weeks and months.

Investor Takeaways

In the public Bitcoin mining space, there are roughly 2 dozen companies to choose from. Each of these entities is facing a significant macro headwind next year as the April block reward halving will virtually cut miner revenue in half overnight if the price of BTC and global hash rate both stay constant. In my view, and I think this view is shared broadly throughout the industry, the halving is likely going to put the weak dogs out of their misery. Given what I view as strong execution of a corporate strategy and a focus on mining efficiency, I believe TeraWulf is positioned well to be one of the survivors post-halving.

I've taken a small introductory position in WULF shares at an average share price of $1.72. WULF is now one of five public miner equities that I'm exposed to and I anticipate holding WULF through the halving. I'll reiterate what I've said in countless SA articles; the safest way to benefit from an increase in the price of Bitcoin is to just hold BTC directly. However, for those with a high risk tolerance who want additional upside to gains in BTC pricing, miners like TeraWulf in an brokerage account may offer that upside.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WULF, CLSK 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.

I'm not an investment advisor.

Comments

[Mike Fay]

Obviously, this has been a painful trade. I have been averaging down in chunks for what it's worth. Share registration since this article likely hasn't helped. But WULF was big outperformer on the way up this summer and that's likely the reason it's getting shredded to the degree that it is now - chart via my Substack to any interested:
faybomb.substack.com/...

[Mo Money 2011]

@Mike Fay would you load up now that its revisiting valuation lows before the run-up?

[Mike Fay]

@Mo Money 2011 honestly, I think it may be going lower. The underperformance even as BTC rips over $36k is a bit concerning. As for loading up, I would be very cautious about getting over exposed or firing off too much powder at once. I generally try to average down in many increments as I work on cost basis. These companies are running out of time to make the move up and it may take a new ATH in Bitcoin to get it at this point

[pennyether]

1) They didn't reduce debt, they increased it. Q1: $146m. Q2: $146.1m. They are paying $8m / quarter for that debt. Just electricity + debt nearly puts them in the read. Then they have payroll ($8.5m).

2) If you want to play the "liabilities decreased" game, also look at their assets. They decreased by $17m. This is because they have to decrease the book value of their mining hardware, which they somehow valued at $18/TH despite newer hardware that mines 40% more BTC for the same amount of wattage being cheaper than that.

3) In order to break-even, their revenue would basically need to double. If this happened, BTC would have doubled, and you can bet that hashrate will climb and result in starkly lower margins.

4) Once halving happens, even if BTC doubled, they'd be back to burning $8/quarter. Likely much more, as their revenues would have declined and costs would have gone up due to hashrate increasing.

5) "Looking at the balance sheet, cash levels were noticeably lower from $17.0 million at the end of Q1 to just $8.2 million at the end of Q2." They have $8.2m in cash left, $14m of liquidity. They burn $8m / quarter. They won't be able to keep the lights on without raising cash. Debt or dilution, take your pick!

6) Plans to expand this cash burning endeavor? Sure, why not double down! Well, first they need cash to burn.. so take your pick: debt or dilution.

[RowerXX]

@pennyether Wulf announcing earnings at EOD. I would be shocked if they weren't amazing given the price of BTC. I don't think there's any risk of bk, much of the debt is held by insiders. This is basically a trading operation.

[pennyether]

@RowerXX Operating loss of $10m. Net loss of $20m. Is this amazing?

[pennyether]

@RowerXX They raised ~$58m from dilution. None of these miners are at any real risk of bankruptcy, as they have massive shelf offerings that ignorant investors continually ignore, or see as "bullish" because it means they can "grow".

[Fast Falcon]

For principle/sovereignty direct holding is the best, but miners are a good idea for liquidity and other reasons, though you run the risk of capital gains taxes or confiscation in the future if you are a retirement device user. That said, what are you current top picks for asymmetry approaching the halving and beyond? This, CLSK? What about BitFarms? Should one just use MARA or RIOT to balance it out since risk might not be as smart with gains projected post halving anyway? Thanks.

[Mr Nobodi]

@Fast Falcon I prefer the mid tier miners over the big boys. RIOT and MARA are maybe the least conservatively run
miners. Its a risky business by default. If management goes all in it just adds to that risk. WULF, CLSK, and BITF are my 3 biggest miner positions. Though I also own others. The biggest reason to own miners IMO is the large option premiums. Which is why I also own some MARA and RIOT despite considering them the riskiest. They have the most liquid options.

[rppearson]

@Mr Nobodi exactly!

[globalmacro]

EVERYONE says they will only dilute if it's accretive

If you take management commentary at face value you will get slaughtered in this space.

[Off the Radar Investor]

this is a great article. Cost of energy is everything post halving and they are hands down the lowest with the best assets. Really only miner whose management has their goals totally aligned with shareholders with 55% ownership.

[FourDecadeStreetExec]

Great summary. Have a toehold too, but really would like them to bring down SG&A.
Their debt really scares me. And I appreciate they don’t want to dilute, but what are their options?

[Mike Fay]

@FourDecadeStreetExec agreed on the dilution, it's probably coming. The debt is real the story, IMHO. If they can pull themselves out of that hole, their unit economics are so much better than their peers that I think they're one of the few that don't get wrecked in the halving.

[LeroyJankins]

@Mike Fay how do you think they deal with the debt if not (a) issuing substantial shares to bring leverage down and refinance (b) rolling the debt at a ridiculously high rate because lenders in the area now expect equity like returns for the risk profile?