Core Scientific: Deserves Better As HPC Moves Into High Gear

seekingalpha08-13

Despite having seen its share price fluctuating alongside Bitcoin since the halving event, Core Scientific has nonetheless delivered a net upside of 200%.Still, it is underpriced based on potential ...

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Scientific：随着HPC进入高速发展，值得更好","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"83042":0.6,"GRDI":1,"DLR":1,"CORZ":1,"BTBT":1,"03042":0.9,"03008":0.9,"03439":0.9,"09008":0.9,"09439":0.9,"NVDA":0.7,"09042":0.6},"content_text":"Despite having seen its share price fluctuating alongside Bitcoin since the halving event, Core Scientific has nonetheless delivered a net upside of 200%.Still, it is underpriced based on potential revenues to be obtained from HPC or High-Performance Computing leasing.Also, volatility is likely to continue in the short term due to predominant exposure to digital assets, but the strong operational performance and HPC focus are key advantages.Also, it bears high debt, but continued diversification into hosting versus self-mining means more stable cash flow generation.The company achieved milestones, leased a data center in Austin, and secured a contract with CoreWeave for 382 megawatts, with potential revenue of $6.7 billion.objectifphoto/iStock via Getty Images Bitcoin (BTC-USD) has been highly volatile after the halving event on April 19 as per the chart below, flirting with the $73 level then dipping to $50K, and stabilizing around $60K, for now. In its wake, Core Scientific (NASDAQ:CORZ) also suffered, but still delivered a net upside of above 200% and was trading around $9.75 at the time of writing. Data by YCharts This is largely due to its strong execution in keeping mining costs down and rapidly delivering on the HPC or High-Performance Computing mandate, as I detail further. Thus, this thesis aims to show that it deserves better, and to make my point, I will compare it with an industry peer, but I start by showing how it has adapted to the post-halving period characterized by challenges for miners. Post-Halving Challenges The halving event has brought a lot of pain for Bitcoin miners in general, as the reward for creating a block using time-consuming and complex mathematical calculations and adding it to the blockchain network has been reduced by half from 6.25 BTC to 3.125 BTC. At the same time, the cost of production which mostly consists of energy has either remained the same or increased in the face of higher inflation, without forgetting wages having to be adjusted upward. Add to this higher interest rates of above 5% which inflates the cost of refinancing and creates financial stress for those whose balance sheets are not strong enough as a result of not having HODLed (accumulated) sufficient coins for hard times. In consequence, they can either go bankrupt or end up being acquired. In this respect, there is the example of non-profitable and indebted miner GRIID Infrastructure (OTCPK:GRDI) as I recently elaborated in a recent piece. It was acquired by CleanSpark (CLSK) for an enterprise value of $155 million at the end of June, with the acquirer assuming Griid's debt and providing working capital as part of the deal. Furthermore, with fewer bitcoins remaining to be mined, the degree of competition has gone up, which has considerably increased mining difficulty (by around 67%) for miners in general as shown in the chart below. This again shows the need to become more efficient, which for miners means investing in the latest and most efficient mining rigs like the S21 from manufacturers like Bitmain. Data by YCharts In these conditions, miners who had priorly planned the halving event and adjusted their operations have been rewarded by the market, which is the case for Core Scientific which derived 78% of its revenues from mining Bitcoin directly (self-mining) during the second quarter of 2024 (Q2). The rest consisted of income from leases of hosting space to other miners (18%) and the emerging HPC business (4%). Reducing Production Costs and Generating Operating Income Looking deeper into the adjustment, one metric that it has been able to control is the cash cost to mine, which is the total power consumed and operating costs of its self-mining and hosting facilities divided by the total number of Bitcoins it mined. Thus, cash cost to mine increased by 60% in Q2 to $29.9K compared to the same period last year. Normally, this should have gone up by 100% had not the company not migrated its mining rigs to sites with more favorable power pricing and transitioned to newer equipment such as the 10K new S21 between March 31 and April 30. Second Quarter Results from earnings call presentation (seekingalpha.com) In addition, instead of engaging in a race to increase the number of coins minted, the miner has adopted a fleet curtailment strategy to mitigate the effects of the halving, seeing it produce 447 in May, down from 803 in April. Thus, it produced 430 and 411 Bitcoins in June and July, respectively. Pursing further, it earned 1,680 coins and generated $141 million in sales in Q2, which it used to pay for operational expenses which have increased compared to the same period last year as shown below. Still, it was able to increase its operating income. SEC Filings (seekingalpha.com) Shifting to the balance sheet, the company's strategy is to sell Bitcoins to the tune of 401 and 479 in July and June respectively has also enabled it to avoid borrowing and increase debt. On the contrary, it was able to reduce debt to $552 million, or by $56 million, mainly by voluntarily converting senior notes into equity. This not only reduces the interest payment burden for a company whose total debt of $621 million exceeded its cash position of $96 million at the end of Q2, but also demonstrates the willingness of creditors (bondholders) to exchange debt for shares at a time of digital asset volatility. This also shows confidence in light of the company emerging from Chapter 11 Bankruptcy and diversifying into HPC. The Diversification into HPC This strategy got a boost on Aug 6 after AI hyperscaler CoreWeave exercised an additional contract option for the delivery of approximately 112 MW (megawatts) of additional infrastructure, as illustrated below. This extended the previous agreement, bringing the total contracted infrastructure capacity to 382 MW at five sites. CoreWeave can optionally request a further expansion of 118 MW to bring the total to 500 MW. Just a note on CoreWeave, it specializes in providing AI and cloud computing infrastructure to customers to host their HPC workloads in contrast with conventional data center service providers (also called colocation providers) like Digital Realty Trust (DLR) which cater to more general requirements. Thus, it procures GPUs from Nvidia (NVDA) to house them in the energized facilities it leases from Core Scientific. investors.corescientific.com Looking across the industry, Bit Digital (BTBT) has also diversified into HPC infrastructure leasing and is on track to benefit from around $275 million of HPC-related revenues during the next three years, or $92 million per year. Thinking aloud, investors may find it difficult to understand why AI hyperscalers have turned to miners instead of building up their infrastructure or leasing space from data center colocation providers. The reason is that the GPUs being supplied by Nvidia are power-hungrier than normal CPUs by over two times and colocation facilities are not necessarily equipped to handle the energy demands, and they are mostly located in large metro areas like North Virginia where utilities cannot provide them the additional power needed due to high demand and restrictions. Thus, there is a need for AI-specific data centers, and here, the advantage of miners is that in their quest for cheaper and renewable power sources to mine Bitcoin, they already dispose of facilities that can be used to host HPC. In this case, Core Scientific operates 830 megawatts, but its total contract covers 1,200 watts. Thus, as a result of being contracted by CoreWeave, the miner could potentially generate $6.7 billion over the next 12 years from HPC hosting beginning from the first half of 2026, or around $550 million on an annualized basis. This is six times Bit Digital's while Core Scientific's trailing price-to-sales is trading only slightly above, which means that it deserves better valuations. Valuing Core Scientific First, for clarification purposes, the $6.7 billion represents an addition of $2 billion on the previous one signed on June 25 which amounted to $4.7 billion for 12 years, or $391.67 million per year. Now, the consensus revenue estimate of $796.42 million shown below already seems to include this amount but the last review done on August 9 (or one day after the contract signature) only adds around $2 million to the previous estimate of $794.49 million, instead of $167.67 million, which is the amount obtained by dividing the additional $2 billion by 12 years. Thus, adding this amount increases the revenue estimate to $962.67 million, which increases the YoY growth to 37.66% and conversely reduces the forward price to sales to 2.61x. This translates into a target of $11.7 (962.67/796.42 x 9.7) based on the current share price of $9.7. Table built using data from (seekingalpha.com) To further justify this bullish stance, the company's trailing price-to-sales of 4.98x is slightly above Bit Digital's as shown in the table below while it is on track to receive six times more HPC-related sales. Furthermore, in case CoreWeave exercises the optionality to request a further expansion of 118 MW (from the existing 382 MW), the total under HPC leasing could be brought to 500 MW, placing Core Scientific in the same league as one of the ten largest data center operators in the world. This is the reason I have extended the comparison to the colocation giant whose higher P/S of 8.69x shows that Core Digital remains underpriced despite its 200% upside since Bitcoin halving. Comparison with peers (seekingalpha.com) Therefore, I valued the company about 20% higher, but this is more from a long-term perspective as it executes on HPC. Risks Because of Bitcoin Mining But Should Generate More Cash From HPC However, in the meantime, since it derives more than three-quarters of its revenues from Bitcoin mining (chart below), the company remains vulnerable to crypto volatility as the price of the digital asset can fluctuate dramatically, directly impacting Core Scientific's revenue and margins. Also, at this stage, HPC contributes to much lower gross margins or 11%. Company presentation (seekingalpha.com) Another factor that plays against profitability is network difficulty, which affects the profitability of mining operations. These effects can be contained depending on how fast it can diversify to HPC. To this end, it has been rapidly progressing after leasing a 16-megawatt data center in Austin whose expansion was completed ahead of schedule thereby enabling sales to be generated in Q2 itself, and as part of a separate HPC business segment. Moreover, it distinguishes itself from other players in its industry, first by generating cash from operations (table above), largely due to hosting Bitcoin miners at its facilities thus obtaining stable leasing revenue. Looking forward, as the contribution of HPC leasing increases, it should generate more cash from operations and even land a positive FCF given the capital expenses for transforming facilities to accommodate AI computing are being borne by CoreWeave. This capital-light strategy also means less likelihood of increasing its debt load. Coming back to the price action, the $11.7 target corresponds to the peak attained on July 16 seen in the chart below, and subsequently, the shares reached a trough of $8.2 on August 5 before news about the HPC contract extension propelled the shares higher. Therefore, in the absence of another catalyst and amid all the AI hype as I had elaborated upon in a previous piece, the shares can be under pressure. seekingalpha.com  Finally, there are short-term risks, but because of Core Scientific's ability to execute both on adjusting to Bitcoin halving and to support AI infrastructure, it is a buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459057669"}