There’s no way to properly know how important the health of HIVE Blockchain (HIVE.V) is for other companies in the blockchain sector, but just as good figures for Canopy Growth Corporation (WEED.T) tend to help float the rest of the cannabis sector, so too did the handbrake turn HIVE applied late last year drag the blockchain market into its first correction.
Since then, those of us with HIVE stock (present), and those with stock in their competitors, have all been waiting for that outfit to put out a full quarter of financials so we can get an idea of what the top end on crypto mining will look like in terms of profit and loss.
Yes, we know mining crypto isn’t the be all end all of blockchain tech, but enough companies have made a bet in the space that putting some value on the activity brings a little clarity to others.
Or at least it should. HIVE results just emerged as I write this and the consensus is… still forming.
Here’s what the company has said are the highlights.
Expanded operations in Iceland with acquisition of second phase of GPU-based mining rigs from Genesis Mining Ltd. (“Genesis”), bringing the Company’s digital currency mining footprint in Iceland to 3.8 megawatts (“MW”);
We like this, though Iceland is still small relative to what’s planned. It’s making money, but not enough to justify this market cap.
Here’s what does justify it:
Solidified strategic partnership with Genesis with agreements to jointly construct two state-of-the-art data centres in Sweden to add a further 40.4 MW of capacity by September 2018, including 20.4 MW dedicated to mining GPU-based digital currencies such as Ethereum, Ethereum Classic and ZCash (the “Sweden GPU Data Centre) and 20.0 MW dedicated to mining SHA-256-based digital currencies such as Bitcoin and Bitcoin Cash (the “Sweden Bitcoin Data Centre”);
So basically a 10x in capacity compared to what’s currently operating, which has brought in $3.2m in crypto over the last three months as is. When that 40MW is rolling, at today’s crypto value, you can do the ballpark math on what that looks like when all gears are grinding.
Net income of $149,724 for the period
This will make the dummies sweat, but observers would be wise to note the quarter includes big payments to set up those monster facilities going forward. In a growth phase, net income is a bad metric to hang your hat on.
Raised $147 million (CDN $187 million) of growth capital in the quarter to finance rapid expansion and future growth opportunities and investments;
This also makes the dummies sweat because they worry about dilution. They shouldn’t. HIVE raised scads of cash because the announced expansions so far are the first of many. The many will kick in later, so what you’re going to be looking at is a continual catch up where revenues now are offset by expansion capital that won’t generate revenue until later quarters, leading to break evens or even losses as the company grows.
If you’re going to play in the market, you’re going to have to understand how that works. Think how Amazon has rarely made a profit as it has consumed market share and dominated the planet. and everyone has been cool with that because THEY DOMINATE THE PLANET.
Generated revenues of $3,274,186, with a gross mining margin (Note 1) of $2,382,687, from mining of digital currencies at Iceland facilities;
Those margins are filthy. If they can keep that sort of margin in place as the 10x power growth kicks in, this is going to be a wild ride.
Accumulated and held $5,827,805 worth of newly minted Ethereum, Ethereum Classic and ZCash as at December 31, 2017;
Some deciphering is necessary here. So Iceland, which is a small facility compared to what’s in the works, generated $3.2m of crypto at a cost of around $900k in ops.
Expanding outward from that, HIVE says they’re looking at this sort of future:
HIVE’s annualized run rate revenue […] is projected to be $153 million once its announced Sweden expansion is fully online, which is expected by September 2018. The annualized run rate revenue is calculated strictly on the basis of value of the digital currency earned at the time of mining, and does not include any adjustment for revaluation gains (or losses) for digital currencies held after that date.
Those sorts of numbers? They absolutely justify the present market cap of $500m. In fact, they justify a rise.
Return on investment of 36% by December 2017 through investment of $16,284,690 in data centre equipment since September 2017 which has generated digital currencies with a value of $5,827,805.
That’s an insane return rate.
Here’s where the naysayers will kick in:
The Company’s net income from continuing operations after tax for the three and nine months ended December 31, 2017 was income of $149,724 and a loss of $19,690,038; the nine month period ended December 31, 2017 included a one time charge of $16,340,247 related to the Company’s initial transaction with Genesis. General and administration expenses for the three and nine months were $3,283,833 and $6,826,171 respectively, which included non-cash charges for share based compensation of $1,827,024 and $4,533,663 for each of the three and nine months. Ongoing general and administration expenses relate to the Company’s rapid growth plan and compliance costs of being a public company.
Get over it. Growth period.
We now have a measure to predict with at least some sense of accuracy what 3MW of crypto mining three months back returned on the investment. That allows us not only to project HIVE’s numbers going forward (“HIVE’s annualized run rate revenue is projected to be $153 million once its announced Sweden expansion is fully online, which is expected by September 2018″), it also allows us some idea of what others in the space will be making from their MW here and there.
I’m still long HIVE. And I’m still long the sector. I think this is a good time to make bold moves, if the market shows weakness, but those moves are not going to pay off next week.
In addition, if you feel crypto currencies will have another run at some point between now and September, HIVE isn’t selling off its holdings. That fat pile of cash will take a long time to run out, so they’re likely to keep hoarding Ethereum and Bitcoin and such until the price makes cashing it in worth doing.
The market does tend to boil things like this down to a single line, and “HIVE made $150k last quarter” may be enough for dummies to move out. I don’t expect it would make institutional investors do same. There’s a bigger play here down the road when crypto becomes more fully accepted in the financial markets, but requires virgin coin for things like ETFs (banks don’t want to buy coin off a drug dealer, yo, even if they have to pay a premium).
HIVE’s strategy is not yet fully executed, but nobody involved at the pointy end is disappointed by what they see here.
— Chris Parry
FULL DISCLOSURE: HIVE is not an Equity.Guru marketing client, but we hold a stake in the company, as mentioned above.