Core Scientific aligns with macroeconomic trends but overpriced (NASDAQ: XPDI)



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Although Core Scientific (XPDI) has been calm for the past two months, economic conditions and Bitcoin (BTC-USD) are experiencing tremendous volatility. It was only recently that we discovered the relationship between valuation, profitability, market capitalization and stock performance. Here is the summary of our findings:

  1. Only profitable companies or funds with almost 100% profitable holdings achieve positive returns.
  2. Larger cap stocks or funds consistently outperform small cap funds.
  3. Lower valued stocks tend to outperform higher valued stocks.

You can refer to Table 1 for more details.

At first glance, you might immediately think of Core Scientific as it is considered to be one of the biggest, if not the biggest, crypto hosting providers and Bitcoin miners in the industry. It has an expected capacity of 32 EH / s (including hosting and self-extracting) and is valued at $ 4.7 billion at the time of writing.

Therefore, this article aims to clarify the construction of your investment thesis in this way.

Table 1: Summary table of fund performance.

AND F Weighted PSR Weighted PER % profitable distribution Weighted market capitalization Cumulative performance over the year
VUG 7.015 36.7 100% $ 346 billion 25.7%
TO SPY 2.69 22.17 100% > $ 650 billion 18%
VBK 4.44 31.2 90% $ 6.8 billion 3%
ARKX 9.35 24.2 55% 121 billion dollars -6%
ARKQ 13.7 78 67% 153 billion dollars -3%
ARKW 17.8 98 67% 188 billion dollars -11.5%
ARKK 16.8 75.6 44% 153 billion dollars -13%
ARKF 21 108 55% $ 41 billion -16.4%
ARKG 22 35.7 20% $ 14 billion -23.9%
BIGZ 21 35.5 50% $ 10.8 billion -26.4%

Source: Author

Bigger is better, at least in terms of resilience in the face of uncertainty

The divergence between large caps and small caps is caused by the perceived higher level of risk of small cap stocks under very uncertain economic conditions. Small-cap companies, in general, are less resilient to disruption than larger-cap companies. Small-cap companies have a smaller balance sheet or access to capital. They have less diversified sources of income.

This is indeed also true for crypto mining companies. Here, we compare Core Scientific to two of our favorite crypto mining companies (Bitfarms (BITF) and Stronghold Digital Mining (SDIG)):

  • In terms of market capitalization, Core Scientific is respectively four times and 20 times larger than SDIG and BITF.
  • In terms of accumulated mining capacity expected in 2022, Core Scientific is four times larger than SDIG and BITF.
  • In terms of power supply, Core Scientific’s five facilities across North America with a combined power supply of 825 are five times the size of SDIG and 2.5 times the size of BITF.
  • In terms of funds for sustainability and expansion, Core Scientific has $ 450 million in total cash ($ 310 million in cash and 2,800 Bitcoins each at $ 50,000), while BITF and SDIG have 191.65 million dollars (= $ 43 million in cash + 2,973 Bitcoins each at $ 50,000) and $ 136.5 million (= $ 132.5 million in cash + 85 Bitcoins each at $ 50,000) total liquidity respectively.
  • In terms of cost, Core Scientific’s cost of energy per Bitcoin is $ 2.7,000, while that of BITF and SDIG is $ 6.9,000 and unknown, respectively.

Based on this information, we can see the value of investing in a larger cap crypto mining company, given the current uncertainty induced by Omicron and the inflationary environment. Core Scientific has the lowest mining cost, the most cash, and the largest facilities. This makes it the most resilient of the three companies.

Another aspect where Core Scientific is less risky than BITF is the hosting service. The main difference between self-mining and hosting income is that the hosting income does not benefit from the rising price of Bitcoin. Accommodation income is a function of maximum power supply (MW), accommodation rate, availability and energy use efficiency (PUE). In this regard, Core Scientific is more resilient than BITF during a large Bitcoin pullback.

Additionally, a huge potential head and shoulders pattern is flashing in the daily Bitcoin chart. If this downtrend continues, there is a high probability that Bitcoin will turn bearish and resume its bear market dictated by its halving cycle. Therefore, investors might prefer larger-cap Core Scientific to small-cap BITF and SDIG.

Figure 1: Potential Massive Head and Shoulders Pattern on Bitcoin Charts

Source: author, negotiation view

Don’t overpay a good business

As good as Core Scientific may be, our model suggests that Core Scientific is overpriced. In our previous coverage, our model valued Core Scientific at $ 12 per share or $ 4.7 billion assuming Bitcoin of $ 66,000. Now that Bitcoin is struggling to break above the $ 50,000 mark, we have had to revise our price targets for Core Scientific accordingly.

Following the methodology and assumption (with a slight revision: 270 EH / s Bitcoin Network Hash Rate) presented in our previous coverage, our model values ​​Core Scientific between 2.14 billion (-55%) and 3.21 billion (- 32%) on the basis of an amount of $ 50,000. Bitcoin price. That being said, Core Scientific’s downside is pretty limited thanks to its $ 10 NAV.

Using the same methodology, our model suggests an increase of 25% for the BITF and an increase of 345% to 946% for the SDIG. There are several ways to interpret these results.

First, due to the current divergence between large cap and small cap companies, the valuations of small cap companies have been squashed to such an extent that a substantial rise is available. For example, BITF and SDIG both have a similar accumulated expectation of 8 pe / s by the end of 2022. The price of SDIG is only one-fifth of BITF.

Second, perhaps the security of large crypto mining companies (especially the $ 10 net asset value protection currently offered by Core Scientific) is so desirable that investors are willing to pay a premium for it.

Nonetheless, we will respect our belief reflected in our model’s pricing targets for Core Scientific and will not pay too much for a good business. On the other hand, while the current economic trend is not favorable for small cap companies like SDIG, and SDIG could see more of the downside, its upside is too good to ignore.

Verdict and conclusion

Macroeconomic trends have caused a divergence between large-cap and small-cap companies, with small-cap companies falling out of favor due to higher associated risk amid the uncertainty induced by Omicron and an inflationary environment. Perhaps the demand for security has driven more secure (larger cap) companies up, so that the upside becomes limited or entirely overvalued. Combined with Bitcoin’s $ 66,000 withdrawal, that could be the case for Core Scientific.

While macro trends favor Core Scientific over BITF and SDIG, we prefer BITF and SDIG simply because of their valuations.



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