Bitcoin (BTC-USD) is already trading at all-time highs and there are several reasons to believe that the rally is likely to sustain.
First and foremost, the number of cryptocurrency users globally has increased to 300 million. With wider adoption of cryptocurrencies, Bitcoin is likely to trend higher. Importantly, cryptocurrency users comprise only 4% of the world’s population. Thus, there seems to be ample scope for further growth in the industry.
Further, inflation has been accelerating globally. Bitcoin, given its limited supply, is likely to be one of the hedges against inflation.
With a bullish view on Bitcoin, Hut 8 Mining (HUT), a cryptocurrency mining company with industrial scale bitcoin mining operations in Canada, seems like an attractive stock to consider. In the last six months, the stock has trended higher by over 84%. (See HUT stock charts on TipRanks)
However, I remain bullish on Hut 8, considering the factors of Bitcoin trending higher and the company pursuing an aggressive growth strategy.
High Financial Flexibility
A strong balance sheet is a key reason to be bullish on Hut 8. It allows the company to pursue aggressive growth to take advantage of the bull market in cryptocurrencies.
As of June 2021, Hut 8 reported cash and equivalents of $92.7 million. Further, as of August 2021, Hut 8 reported holdings of 4,450 Bitcoins.
At a current Bitcoin price of $63,000, the value of digital assets in the company’s balance sheet is $280 million.
Therefore, Hut 8 has a total liquidity buffer of $372.7 million. It’s also worth noting that for Q3 2021, Hut 8 anticipates 12-14 Bitcoins to be mined on a daily basis. Further, for Q4 2021, the number of Bitcoin mined is likely to increase to 16-18 per day.
The key point here is that digital asset growth will ensure that Hut 8 can pursue aggressive expansion and potential diversification.
It’s also worth mentioning here that for the first half of 2020, Hut 8 reported revenue of $22 million and an adjusted EBITDA loss. However, for the first half of 2021, revenue surged to $65.5 million with an adjusted EBITDA of $30.6 million.
This implies a healthy EBITDA margin of 46.7%. With further increase in Bitcoins mined in the coming quarters coupled with higher Bitcoin price, EBITDA margin expansion is likely to sustain. Positive operating cash flows would add to its financial flexibility.
Ambitious Growth Plans
Hut 8 is positioned for strong revenue and earnings growth through 2022, considering the company’s current plans. This is likely to ensure that the stock’s momentum remains positive.
To put things into perspective, Hut 8 reported power capacity of 109MW for 2020. For the current year, the power capacity is expected to increase to 144MW. Capacity is further expected to swell to 209MW in 2022.
It goes without saying that an increase in power capacity implies strong growth in hash rate in the coming quarters. This is likely to translate into a higher number of Bitcoins mined.
It’s also worth noting that Hut 8 will be expanding to Ethereum mining. This provides further diversification to the digital asset portfolio. Additionally, for Q2 2021, Hut 8 derived $2.2 million in revenue from hosting services.
It seems clear that Hut 8 is looking at diversification beyond just Bitcoin mining. As the company’s financial flexibility increases, there will be ample growth opportunities within the world of cryptocurrencies.
As an example, decentralized finance has witnessed strong growth in the recent past. As of June 2021, there were $93 billion in assets locked in decentralized finance. Therefore, the early movers in the cryptocurrency industry have ample scope for spreading their wings.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, HUT stock comes in as a Strong Buy, with four Buys assigned in the past three months.
The average HUT price target is $13.91 per share, implying 24.7% upside potential from current levels.
Concluding Views
The cryptocurrency industry is still at an early growth stage, with emerging use cases that provide solutions to real world challenges.
It’s very likely that Bitcoin adoption will continue to grow and limited supply will ensure that the cryptocurrency trends higher. Altcoins are likely to follow the trend with the outlook equally bullish for Ethereum.
Hut 8 is among the early movers in the mining industry and the company is positioned for strong growth through 2022.
With increasing financial flexibility, there seems to be ample scope for diversification and further expansion of mining activities.
HUT stock therefore looks attractive with a medium to long-term investment horizon.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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