What Is Hut 8 Stock’s Outlook As Crypto Crashes? (NASDAQ:HUT)

Elevator Pitch

I rate Hut 8 Mining’s (NASDAQ:HUT) shares as a Hold.

Hut 8 Mining’s stock price outlook is murky as crypto crashes, which provides support for my Hold rating.

If cryptocurrencies stage a strong recovery, HUT will benefit with its significant Bitcoin holdings, but its diversification strategy means that it is no longer a pure-play digital asset miner which makes it less appealing compared to other undiversified peers.

On the other hand, assuming that the prices of cryptocurrencies continue to drop, Hut 8 Mining will be hurt by the decline in the market value of the BTC it holds. In addition, it is also still in the early phase of diversification with its newly-acquired data center business’s revenue accounting for slightly more than 10% of its topline last year.

What Does Hut 8 Mining Do?

On its corporate website, Hut 8 Mining describes itself as “one of North America’s oldest and largest digital asset miners.” In FY 2021, HUT derived 95% and 5% of its revenue from self-mining operations and white label hosting services, respectively. Notably, Hut 8 Mining announced on January 31, 2022 that it has completed a deal to “purchase the cloud and colocation data center business from TeraGo Inc. (OTC:TRAGF)” HUT referred to this as its “new data center business” in its June 2022 investor presentation slides.

HUT Stock Key Metrics

There are two key metrics for HUT stock that should be watched closely. The first metric is Hut 8 Mining’s Bitcoin holdings; the second metric is the company’s hash rate.

HUT highlights in the company’s media releases that it has “one of the highest inventories of self-mined Bitcoin of any crypto miner or publicly-traded company globally.”

According to its June 6, 2022 press release, Hut 8 Mining has 7,078 BTC as of the end of May. Based on Bitcoin’s price of $20,782 at the time of writing, HUT’s Bitcoin holdings are worth $147 million or more than half of the stock’s current market capitalization of approximately $270 million. In other words, any major changes in the price of Bitcoin will have a substantial impact on its share price.

Metrics Influencing The Profitability Of HUT’s Digital Mining Operations

Separately, its hash rate, which Hut 8 Mining defines on its website as “the number of calculations a miner can perform in one second solving the BTC code”, is a key metric that influences the company’s profitability as indicated in the chart above.

As per its June 2022 investor presentation, HUT guided that it sees its hash rate rising to 3.55 exahash per second or EH/s and 6.0 EH/s by the middle and end of 2022, respectively. As a comparison, Hut 8 Mining’s current hash rate based on May 2022 operating data is 2.64 EH/s as per its June 6, 2022 media release. All else equal, an increase in HUT’s hash rate going forward will lead to an improvement in the company’s profitability. But there are other factors that “Hut 8 doesn’t control” such as “the price of BTC” highlighted in the above chart which could offset a higher hash rate for the company.

Is HUT Stock A Good Choice As Cryptocurrency Crashes?

The cryptocurrency crash can be seen with the sharp correction in the price of BTC from its November 2021 peak, with Bitcoin currently trading at a third of where it was seven months ago.

Bitcoin’s One-Year Price Chart

There are two key considerations in deciding if HUT stock is a good investment choice with the crash in cryptocurrency markets.

Firstly, Hut 8 Mining is sticking to its strategy of holding Bitcoin, rather than selling part or all of them in an opportunistic manner from time to time.

At its Q1 2022 investor briefing on May 12, 2022, HUT stressed that “we’ve actively been reviewing the strategy (of holding BTC) and are very committed to it.” Hut 8 Mining also emphasized that “selling Bitcoin in this environment (cryptocurrency market crash) to ultimately buy machines would yield less Bitcoin in the long term than the value of just holding on to the Bitcoin.”

This suggests that an investment in Hut 8 Mining is somewhat equivalent to a bet on Bitcoin’s price going up in the long run.

Secondly, HUT has been diversifying beyond its core digital asset mining business, and there are potential plans for further diversification in time to come.

An Overview Of Hut 8 Mining’s Newly-Acquired Data Center Business

This acquired data center business generated around $19 million of revenue in FY 2021, as compared to HUT’s $174 million topline contributed by its digital asset mining business last year. As such, the M&A deal concluded at the beginning of 2022 will help to diversify Hut 8 Mining’s future revenue.

It is also noteworthy that Hut 8 Mining hasn’t ruled out further diversification or additional acquisitions. At the company’s Q4 2021 results call on March 17, 2021, HUT stressed that it “will continue to drive growth through organic and inorganic means” and be “opportunistic when it comes to deploying capital” to “the right assets at the right point in time.”

In conclusion, Hut 8 Mining isn’t a good investment candidate to benefit from the current cryptocurrency crash.

For investors who are bullish on either the short-term recovery prospects or the long-term outlook for cryptocurrencies, they can invest either in cryptocurrencies or pure-play digital asset miners without diversification plans (unlike HUT).

On the flip side, those who wish to hedge their bets will prefer companies with a relatively more flexible approach towards holding Bitcoin. While Hut 8 Mining’s diversification strategy reduces risks, the company’s intention to hold BTC could result in prolonged share price weakness for the stock assuming that Bitcoin’s price remains in a downtrend for a longer-than-expected period of time.

Is Hut 8 Stock A Fair Value?

I don’t think it is possible to determine with certainty if Hut 8 stock is either undervalued or at a fair value.

Hut 8 Mining’s headline valuation multiples appear to be cheap. Based on valuation data sourced from S&P Capital IQ, HUT is currently trading at consensus forward next twelve months’ price-to-sales, EV/EBITDA, and normalized P/E multiples of 1.8 times, 5.2 times, and 3.8 times, respectively.

However, HUT’s future revenue and earnings are closely tied to the price of Bitcoin, which suggests that there will be a wide variance in the estimates of the company’s forward-looking financial metrics. In other words, Hut 8 Mining might not be as undervalued as its valuation multiples imply, if the prices of cryptocurrencies decline further going forward.

As such, I am of the view that HUT’s Bitcoin holding strategy and diversification plans are the key factors that will influence its future share price performance in the intermediate to long term, rather than its current valuations.

Is HUT Stock A Buy, Sell, Or Hold?

HUT stock is a Hold. A Buy rating isn’t justified for Hut 8 Mining, as it is not the best investment choice to bet on a recovery in cryptocurrency markets as compared to pure-play cryptocurrency miners or cryptocurrencies. On the flip side, HUT doesn’t deserve a Sell rating, as its revenue diversification plans will mitigate the risk of a further decline in cryptocurrency prices.