Summary Bitcoin miners, including TeraWulf, have experienced extreme volatility recently, creating trading opportunities and risks. TeraWulf's stock price has seen significant fluctuations, with a breakout retested at $2.75 and strong long-term trendline support. TeraWulf's fundamentals show a strong balance sheet, rapid growth, and low mining costs, but valuation indicators suggest the stock may be overvalued. Bitcoin miners have been unbelievably volatile in the past few months, marked by a massively bullish phase followed by some really ugly selling. That's created a bunch of trading opportunities, but also a lot of risk. One miner that's seen the share price double and then get cut in half in the span of a couple of months is TeraWulf (WULF), a $1.2 billion market cap miner. I first covered TeraWulf last December, and the stock is up about 138% since then. I had a speculative buy on shares at that time, and in hindsight, it was in the early stages of a massive symmetrical triangle, which you can see on the chart. With about eight months of trading activity behind us since then, I have the same cautiously optimistic outlook on TeraWulf, this time at $3.60. Let's dig in. Breakout Retested = All Clear? That's the key question here, and right now, I think the risk/reward is skewed toward the bulls on the chart below. The symmetrical triangle I mentioned above had a breakout in early June right around $2.75, and that's the level that was hit in early August during the very brief period of panic we had in the market. Shares have exploded higher since then, so that's a very tradable bottom in my view. StockCharts It also happened to correspond to long-term trendline support, so that $2.75 level should be seen as a long-term critical level for the bulls to hold. Right now, I have no reason to think we'll test that low, let alone go back through it. On the daily chart, I like TeraWulf so long as it holds that uptrend line, which is currently about $2.90 or so, but rising quickly. On the other hand, August through October is tremendously bearish from a seasonality perspective for TeraWulf. Seeking Alpha Seasonality is a secondary indicator (with price being primary), but this is really ugly and not something I want to just ignore. That makes watching those levels on the chart even more important, and seasonality should be ignored at one's own risk. The Fundamental Picture TeraWulf is one of the smaller miners, but like others, is growing extremely rapidly as it scales capacity in the wake of the April Halving event. Investor presentation In the most recent quarter, the company boosted its capacity to 8.8 EH/s, which was almost doubled year-over-year. It mined the equivalent of about $450k per day in Bitcoin (based on today's price) at a power cost of $23k per coin. At $57k per Bitcoin, that leaves about $34k per coin to cover expenses not related to power costs, and of course, profit. The company held basically no Bitcoin on its balance sheet, which is a departure from some of the larger miners that are hoarding thousands of coins to take advantage of price increases from a balance sheet perspective. TeraWulf is choosing cash instead, and its cash balance was significant at $104 million. Net debt was negative at the end of June, which is outstanding. Investor presentation Management reckons it has the best adjusted gross margins in the business, with 65% adjusted gross profit margins in Q2. We all know margins are extremely volatile in Bitcoin mining, so that doesn't necessarily make a sustainable competitive advantage, but TeraWulf does seem to be fairly consistently enjoying low mining costs on a relative basis. TeraWulf is still diluting shareholders quite rapidly, which is common for Bitcoin miners, but it's something that holders of the stock need to be aware of. As TeraWulf issues more and more shares, your relative stake diminishes. Investor presentation I will say that the fact TeraWulf has fully funded itself through year-end is a positive, but the margin here is thin. Much of this depends upon its ability to mine and sell Bitcoin for favorable prices through year-end, so the price action of Bitcoin itself will (obviously) be quite critical. The bottom line on the fundamentals is that for now, the company has a very strong balance sheet with little funding risk. It is also enjoying strong mining margins thanks mostly to its low power costs. The problem is that it needs Bitcoin pricing to remain high to fund itself under the current strategy, and unlike some other miners, if Bitcoin pricing does take off higher, it stands to gain less given it has essentially no Bitcoin on its balance sheet. Still, all in all, TeraWulf's fundamentals look pretty good to my eye; it's just more of a pure-play miner than the companies that hold a lot of Bitcoin to take advantage of price increases. Valuation is in the Eye of the Beholder Tackling valuation is always tricky for a Bitcoin miner, but we have a few things we can look at to gain some clues. Let's start with enterprise value to sales, which is simply a measure of what investors are willing to pay for a dollar of revenue. TIKR This has moved around a lot in the past couple of years but has recently plummeted off the highs. At ~6.8X sales, the stock is certainly not cheap. Its average valuation has been more like 4X sales, with the 2024 low valuation right in that same area. On this measure, I'd say TeraWulf is somewhat overvalued. Now, let's take a look at TeraWulf's valuation against the price of Bitcoin itself, a favorite way of mine to value Bitcoin miners. StockCharts In the top panel, we have TeraWulf's stock price relative to Bitcoin's price. In the second panel, we have simply TeraWulf's stock price, and in the bottom panel, Bitcoin's price for reference. We can see TeraWulf's rally from that breakout point in early June was almost entirely a valuation expansion, not only from a price-to-sales perspective as we saw above, but relative to Bitcoin as well. I'd prefer to see moves up in the share price come from higher Bitcoin pricing - which implies higher profits - so this is not great. Bitcoin itself is also in a downward consolidation since the peak in March, so again, not particularly inspiring here if you're a TeraWulf bull. On this measure of valuation, I come to the same conclusion, which is that TeraWulf looks overvalued. The Bottom Line With all of this in mind - the bullish-looking price chart, what I see as favorable fundamentals on balance and the relative overvaluation of the stock - I'm still cautiously optimistic on TeraWulf. The weight of the evidence, in my view, suggests the risk is to the upside. I'm cognizant of terrible seasonality so that's a concern, but so long as that uptrend line is respected - currently just under $3 - I like TeraWulf going into year-end.
