Summary Hut 8 just released its report for Q2-24 earnings. Posting $70.4 million in negative net income in the quarter is entirely due to FASB accounting rules. Revenue growth aside, there are concerns. Including 82% of HUT's BTC stack being pledged as collateral, liabilities growing faster than assets, and doubts about the ability to monetize AI. I've been covering Hut 8 Corp. ( HUT ) on Seeking Alpha for nearly two years. My last article was nearly 10 months ago back in late October 2023. Until that last article, I'd long called Hut a "hold" and viewed the company largely as a Bitcoin treasury play given Hut's massive BTC treasury to market capitalization relative to peers. I left readers with this thought last October: Like other crypto mining entities in the public markets, Hut 8 is trying to get traction in HPC services. To this point, I'd argue that revenue growth story has been bordering on non-existent. However, as we approach the Bitcoin halving, I am of the opinion that we are now at the point where taking some speculative shots on public miners makes sense. But until the merger is completed, Hut's story is less clear than some of its peers. A lot has happened in the time since I wrote that article; some of which has been specific to the company and some that has been industry-wide. Hut's merger with US Bitcoin has been completed. Former CEO Jamie Leverton left the company. The company closed a $150 million investment from Coatue to expand HPC services for AI businesses. The Bitcoin USD ( BTC-USD ) halving occurred in mid-April. Spot BTC ETFs were approved in the US market. I won't unpack all of these developments individually as I've covered some of them in previous Seeking Alpha articles. I'll sum them up briefly in this way; this halving cycle will continue to expose financially weak miners and Hut 8 has been in that camp. In my view, this is why the company has completed a merger, a new CEO, and closed a 9-figure investment for a different line of business. In this update, we'll look at the company's freshly released Q2-24 earnings, July Production, and the balance sheet. Q2 Earnings It's important to remember that the year-over-year comps on these revenue figures are post-merger with US Bitcoin. What stands out to me is the decline in mining as a percentage of total revenue: Q2-24, 10-Q (Hut 8) During the second quarter of 2023, crypto mining made up about 77% of the company's total revenue. As of the latest quarter, that figure is down to just 39%. Managed services generated $9 million for the company, this was roughly double what the segment did in the prior year period. HPC and "other" combined for over $12 million. Year-over-year revenue growth of 72% was in line with growth in total cost of revenue. Q2-24, 10-Q (Hut 8) The net loss and opex figures are a bit deceiving here. This year, we are seeing the impact of FASB's fair value accounting. These new accounting standards allow Bitcoin mining companies to include unrealized gains and losses on the digital assets that they hold in quarterly income statements. Not only will Hut 8's quarterly net income from operations swing wildly from quarter to quarter because of this, but since Hut 8 has such a large stack of BTC relative to the company's market cap, those swings in quarterly net income may be quite large by comparison. In the company's earnings presser, this FASB impact was described in this way: The price of Bitcoin on March 31, 2024 was $71,289 compared to the price of Bitcoin on June 30, 2024 of $62,668, such that the decrease in Bitcoin price during the quarter resulted in losses on digital assets of $71.8 million. Shifting to the balance sheet, we can see the big Coatue cash infusion reflected by the company's 475% year-to-date change in cash. Asset growth has been strong due to that cash supply. But I do see a couple of things that stand out: USD in thousands 6/30/24 12/31/23 Change Cash 175,476 30,504 475.3% Total current assets 195,657 61,620 217.5% Digital assets 313,724 282,997 10.9% Digital assets pledged as collateral 255,687 100,550 154.3% Total non-current assets 891,320 679,220 31.2% Total assets 1,086,977 740,840 46.7% Total current liabilities 116,788 112,558 3.8% Total liabilities 418,655 253,201 65.3% Source: Hut 8, 10-Q First, total liabilities are growing faster than total assets. This can certainly change very quickly if Bitcoin's price moves back up to a new all-time high between now and when Q3-24 ends. However, the significant red flag in this table from where I sit is the large move higher in digital assets pledged as collateral. At the end of last year, a little over a third of the company's BTC had been pledged. We now see that figure is over 80%. If the market or the business turns against Hut, we could see that stack drawdown. This would be disappointing for bulls as I see that treasury being one of the only real reasons to hold HUT shares at this point in time. July Production and Treasury Update July 2024 Mining Sector Production (Compass Mining) Hut's July production figures show a company that badly needs another revenue stream. With just 5.5 exahash per second committed to self-mining, Hut's 105 BTC mined during the month puts it on the lower end of the publicly traded miners last month. Hut mined less BTC than HIVE Digital Technologies Ltd. ( HIVE ) despite having a market cap three times the size of HUT and similar Q2 revenue figures. Monthly BTC Production (Hut 8, Author's Chart) More importantly though, Hut's long-term production trend is troubled as it now takes double the hash to mine the same level of coins that the company was mining a year ago. This is by no means unique to just HUT but still an issue nonetheless. We've seen this general business model weakness manifest in the company's inability to scale its BTC treasury stack for the last 20 months: Monthly BTC Stack (Hut 8, Author's Chart) As a percentage of the company's total market cap, shares are 52% backed by Hut's BTC stack. This would theoretically make HUT a fairly decent raw BTC proxy if the company turned off machines, liquidated hardware, and just rode Bitcoin higher without spending on operations. But that is not something that is likely, to put it mildly. Risks Data by YCharts Hut 8's Bitcoin mining business is deeply flawed. The fixed supply of Bitcoin's native currency means that the global hash rate being equal, production declines must be offset by a doubling in Bitcoin's price every four years for the numbers to make sense. Of course, the hash rate has historically gone up rather than stayed constant and the economics of mining get considerably worse with more compute competition. Perhaps equally concerning is the pivot to AI as a business model may not bear much fruit either. From a Futurism article in late July: An increasing number of Silicon Valley investors and Wall Street analysts are starting to ring the alarm bells over the countless billions of dollars being invested in AI, an overconfidence they warn could result in a massive bubble. This is a sentiment that was shared by LRT Capital Management in this really strong report earlier this month. It turns out, so far, it's been easier to buy GPUs than to monetize them for HPC services. And we've probably known this already for Hut 8 specifically. HPC has been a desired growth area for the company for at least the last two years since I've been covering the stock and yet at just $3.3 million HPC revenue was lower last quarter than it was in Q2-22 . Investor Takeaways I'm downgrading HUT shares back to "hold" from "buy." I think the stock may very well benefit from any significant rally in BTC since so much of Hut's market capitalization comes from its treasury stack. But on the merits of the business itself, this is a company that is going through changes and is very much swimming upstream in my opinion. During the conference call, CEO Asher Genoot mentioned more than once that Hut 8 is not a Bitcoin mining or an AI company, rather it's an 'energy company.' Time will tell on that. Energy company aside, in my view, Hut 8 needs either Bitcoin to rally to significantly higher highs from current levels, or it needs revenue from generative AI services to justify all the spend on infrastructure. Perhaps Bitcoin can take HUT shares higher if the coin hits six figures. But I don't think revenue growth from HPC services is a likely outcome anytime soon, and I'd exercise quite a bit of caution on this one going forward.
