Summary CleanSpark's conservative 200% upside has been fully realized in just 6 months and is now overvalued. CLSK's 45% overvaluation, potential 28% dilution, and diminishing yield from expansion efforts make its downside risks greater than the upside potential. The excessive risk from the halving event further adds to the existing company-level downside side. The Company's path to becoming the biggest Bitcoin mining company could be a journey that investors can't enjoy. Introduction In our previous article , we presented our thesis that projected CleanSpark ( CLSK ) to do the following: 24% shareholder dilution to fund its 16 EH/s expansion plans 2x potential return from $428mil market cap to $1.27bn market cap Now that these projections have been realized, this article serves as an update to our previously established thesis. We have a lot to unpack, so let's dive right in. The Updated Thesis: CLSK's Overvaluation We would like to start with this statement: CLSK is no longer undervalued and is now overvalued . CLSK's transition from heavily undervalued territory to overvalued territory is similar to Bitfarms ( BITF ) back then. Within a period of about 6 months, BITF rallied from $4 to $9 . before a call to go short on call options was issued. That rally turned BITF's undervaluation into overvaluation. Over the past 6 months, CLSK rallied from being a $400mil market cap company to become a $1.4bn market cap company, fully realizing our $1.2bn price target even though Bitcoin hasn't reclaimed its ATH. Therefore, this rally also could potentially turn CLSK's undervaluation into overvaluation. Due to the halving event that is expected to occur in April and the potential disruption that might come with it, we limit our price targets only to April 2024. Our model conservatively values CLSK at $972mil (=$9,500 * on the following basis: CLSK is expected to mine 5,513 Bitcoin annually with the current 10 EH/s capacity and 100% CAGR Bitcoin network growth rate Each Bitcoin will yield $9,500 in net profit (= $42,500 Bitcoin price by April 2024 - $33,000 average total all-in business cost per BTC) This translates to $52mil in net profit, at 5 PE multiples, is worth $260mil Together with CLSK's Adjusted Net Asset value of $712mil (=3,002 BTC * $42,500 + $29mil cash + $564mil PP&E + $76mil Deposits - $84.35 Total Liability), CLSK's entire business should be worth $972mil. This implies that CLSK is overvalued by 45%. This is a stark contrast to its valuation just 6 months ago where it was trading below its adjusted net asset value. Another driver of downside risk is shareholder dilution. The reason we did not use share price as a unit of upside potential is due to shareholder dilution. For example, even though CLSK's market cap increased by 229% from $428mil in July 2023 to $1.41bn at the time of writing, CLSK's share price only increased by 91%. This is because CLSK increased its common shares outstanding by 65% over the past 2 quarters (refer to Table 1) and diluted its shareholders by 40%. This exceeded our projection of just 24%. Table 1: Historical Common Shares Outstanding QR((CY)) Shares Outstanding Authorized 2023Q3 160,184,921 300,000,000 2023Q2 131,776,484 300,000,000 2023Q1 96,950,555 300,000,000 2022Q4 71,743,930 100,000,000 2022Q3 55,661,337 100,000,000 2022Q2 41,300,241 100,000,000 2022Q1 41,290,587 100,000,000 2021Q4 41,474,062 100,000,000 2021Q3 37,395,945 100,000,000 2021Q2 34,697,943 50,000,000 2021Q1 33,874,152 50,000,000 Source: Author Now that CLSK has announced plans to expand to 50 EH/s from its fully funded 16 EH/s target, we conservatively estimate that CLSK will need to issue an additional 38.5% more shares (or 28% shareholder dilution) at the current market cap to fund the 50 EH/s expansion plan. Since each 1 EH/s unit costs $16mil , a 34 EH/s expansion would cost a total of $544mil (or 38.5%). Do note that it is highly likely that dilution could be more severe as equity offerings at issued at a discount. This potential 28% shareholder dilution on top of the projected 45% overvalued serves as a severe downside risk for CLSK. Even though CLSK has started aggressively increasing its Bitcoin holdings (Table 2), it is still not sufficient to justify its current market cap. Table 2: CLSK Historical Bitcoin Holdings QR BTC Reserves 2023Q4 3,002 2023Q3 2,240 2023Q2 529 2023Q1 196 Source: Author There is another aspect which we would like to point you to. By referring to Table 3, note that there is a spike in total business cost per BTC in 2023Q3 (fiscal year). The primary culprit is the 43% QoQ spike in depreciation cost, which can be explained by the sharp increase in PP&E supporting the mining capacity expansion from 6.7 EH/s to 9.6 EH/s. Table 3: CLSK Historical Total mining cost, Depreciation cost, PP&E, Mining Capacity QR (Fiscal) Total Mining Cost ($) Depreciation Cost ($mil) PP&E ($mil) Mining Capacity (EH/s) 2023Q3 60,452 57.46 564 9.6 2023Q2 37,050 21.85 482 6.7 2023Q1 33,276 21.36 440 6.7 2022Q4 30,500 19.33 434.8 6.2 Source: Author This is a problem because higher mining capacity may not translate to a proportional increase in Bitcoins mined (Table 4). CLSK managed to mine 1,624 BTC in 2023Q2 with 6.7 EH/s capacity but has only managed to mine 2,019 BTC with 10.08 EH/s. A 43% increase in capacity only translated to a 24% increase in Bitcoins mined. The reason for this disproportion gain is that the mining capacity of the entire Bitcoin mining sector is increasing as a whole, illustrated by the 100% CAGR in the Bitcoin network. In short, the upside that investors expect from this 50 EH/s expansion may not be that optimistic. Table 4: CLSK Bitcoins Mined Relative to Mining Capacity QR (Fiscal) Mining Capacity (EH/s) Bitcoins Mined 2023Q4 10.08 2,019 2023Q3 9.6 1,877 2023Q2 6.7 1,624 2023Q1 6.7 1,871 2022Q4 6.2 1,531 Source: Author Data by YCharts Verdict In our opinion, CLSK's conservative upside has been fully realized and is now overvalued. CLSK's 45% overvaluation, a further potential 28% shareholder dilution, and diminishing yield from expansion efforts make CLSK's downside risks greater than the upside potential. Furthermore, the excessive risk from the halving event, where mining rewards are halved but the cost of mining operations remains the same, further adds to the existing company-level downside side. Nevertheless, we think that CLSK has gained a sufficient following like that of Marathon Digital Holdings ( MARA ) and Riot Platforms ( RIOT ) where share prices are now traded in tandem with the Bitcoin price instead of pure fundamentals. Hence, CLSK could continue to rally on higher Beta to Bitcoin. However, to us, the downside side outweighs such upside potential. Overall, CLSK's path to becoming the biggest Bitcoin mining company could be a journey that investors can't enjoy. We suggest investors to HODL Bitcoin spot or consider option strategies to increase return.
