Summary Analyzing Bitcoin mining stocks like Cipher Mining requires a bottom-up approach at this stage of the Bitcoin market cycle. Cipher Mining's strategic hardware purchases and hosting capacity expansion have made it an appealing stock, with a 67% increase since my December "buy" rating. Q3 is expected to show a revenue decline due to increased mining and electricity costs, but Cipher's prudent "hold-some, sell-some" Bitcoin strategy aids liquidity. Future success hinges on Bitcoin's price; well-positioned mining stocks like CIFR are poised for growth as the market enters a bull season. While crypto-exposed investors anticipate the post-halving price momentum for Bitcoin ( BTC-USD ), I believe that analyzing Bitcoin mining stocks and other crypto-related stocks should take more of a bottom-up approach at this stage. A Bitcoin miner that has well navigated the post-halving challenges and shown operational resilience through strategic capacity expansion as well as in its financials would be in a ready position to capitalize on Bitcoin’s momentum. That's why the discussion of the wider crypto market trend will take a back seat in this analysis, and the focus will be more on the granular details of Cipher Mining’s ( CIFR ) operations. Let's not forget that Bitcoin remains the lodestar for the crypto market. Therefore, identifying mining stocks with solid operational and financial footing now could provide an edge as the market heads into the next phase of the cycle. Every Bitcoin Miner has its strengths and weaknesses, as each miner takes a different approach to navigating the volatile crypto business. Cipher Mining's strategic timing in its hardware purchases and hosting capacity expansion made the stock one of the more appealing mining stocks to me, especially during the months leading up to the halving event. In that period, Cipher Mining's net assets also turned positive. This prompted my “buy” rating for the stock in December in an article titled: " Cipher Mining’s Strategic Planning Will Pay Off ." The stock is up an impressive 67% since that coverage. And one question is whether there is still fuel in the tank for CIFR? Cipher Mining’s Post-Halving Performance and Q3 Results Expectations As we already know, virtually every miner has seen decreased sales since the halving event. The increase in Bitcoin network difficulty has also raised the cost of mining per BTC, which has taken a toll on operating margins. For Q3, I don’t expect exceptional financial performance for Cipher Mining, beyond striving to maintain operations. Q3 months (July to September) are also typically peak electricity demand months on Electric Reliability Council of Texas (“ERCOT”) electricity grids, where Cipher Mining gets the majority of its electricity power. To balance demand on the grid, a utility strategy called the four coincident peak program (“4CP”) is employed. During these 4CP periods, companies face increased electricity rates. For miners, it becomes important to limit energy consumption during these peak periods to save costs and potentially earn incentives. Based on the factors mentioned above, Cipher Mining will see a sequential decline in total mined BTC in Q3. In Q2, Cipher Mining mined 296 BTC in April, 166 BTC in May, and 176 BTC in June, bringing the total mined BTC to 635 BTC and Q2 total revenue to $36.81 million. 100% of Cipher Mining's revenue currently comes from its BTC mining operations. Though the miner has announced plans to diversify into high-performance computing (“HPC”) services, that hasn't taken off properly yet. For Q3, consensus expects a sequential decrease of 21% in Cipher Mining’s revenue, which will result in $28.81 million in revenue. Analysts expect a loss of $0.07 earnings per share. Using the current total shares outstanding for CIFR at 335.27 million shares with the projected EPS loss, this means Cipher Mining is expected to post a net loss of around $23 million. These estimates and anticipated drop in key financial metrics are well within the context of the reduced operational activity miners experience during 4CP periods in Texas. I, however, expect a slightly higher revenue from that of consensus estimates for Q3 because according to monthly production updates, Cipher Mining mined a total of 493 BTC in Q3. In the July , August , and September operations updates, Cipher Mining produced 178 BTC, 160 BTC, and 155 BTC respectively. I have applied the FASB accounting rule, which most miners have adopted, to the dollar value calculation of Cipher Mining's 493 produced BTC in Q3, where I’d use the monthly closing price of BTC as a fair value estimation for each month’s production. July’s closing price was $64,619. In August, BTC closed at $58,969, while in September, the monthly close was $63,329. This brings the fair value for Bitcoin mined in July to $11.5 million, that of August will be $9.44 million, and September production will be worth $9.82 million. The total dollar value of Bitcoin produced in Q3 based on using the monthly closing price as the fair value price will be $30.76 million. I believe the announced sales result for Q3 will be slightly above the consensus estimates of $28.81 million. Beating consensus estimates will bode well for CIFR as Bitcoin is now trading above $70,000 again, sparking a bull market sentiment. Data by YCharts I think Q3 will see QoQ drop in margins due to the higher cost to mine due to increase In electricity cost in 4CP periods and the increase in the Bitcoin network difficulty. Network difficulty is currently at an all-time high. Cipher Mining's 13.5 EH/s mining capacity EoY target remains feasible. Capacity has increased from 8.7 EH/s at the end of Q2, to 9.3 EH/s as of the September operations update. I believe Cipher Mining is on the path to achieving its 13.5 EH/s hashrate target because of the latest acquisition of the 300-MW Barber Lake site in West Texas, bringing total energy capacity to around 2.5 GW. There will be a drop in Cipher Mining’s asset base as less BTC were mined QoQ in Q3, and Cipher also sold $67.5 million worth of its BTC holding to fund the acquisition of the 300-MW Barber Lake site. About 923 BTC were sold in September, bringing the number of total BTC held to ~1,512 BTC as of the end of September. That would be a 33.4% QoQ drop in BTC held. Despite this drop, ~1512 BTC (around $107 million at today's BTC price) is still enough ongoing dry powder for Cipher. While the drop could raise some short-term liquidity concern if the price of Bitcoin drops further, I think Cipher Mining’s “hold-some, sell-some” approach to its produced and held Bitcoin remains prudent. I believe it helps the team swiftly undertake acquisitions they feel will be accretive without always embarking on ATM offerings, thereby severely diluting shares. This approach provides a balanced mix where the company can effectively manage cash flow and operational needs while still benefiting from BTC’s potential future price appreciation. Data by YCharts The massive jump in outstanding shares we saw in Q2 has not been repeated in Q3. So far in Q4, no additional shares have not been issued yet. However, it's important to keep an eye on the amount paid in stock-based compensations in the upcoming Q3 earnings result, as this could be dilutive too, affecting EPS. Stock-based compensation in Q2 was $13.3 million. If this increases in Q3, it could mean further dilution of shareholder value, and doesn’t bode well for investors. Risks As reiterated in coverage of Bitcoin-exposed stocks on Seeking Alpha, these stocks are tied to Bitcoin’s price movement and market sentiment; therefore, they exhibit a higher volatility just like their anchor asset. As Cipher Mining’s Bitcoin stash has shrunk following the sell-off for the 300-MW facility acquisition, and amidst reduced MoM Bitcoin production , Cipher Mining’s short-term liquidity prowess now leans more on a surge in Bitcoin's price. If BTC fails to impress, there is every likelihood that raising funds through equity issuance would recur, as mining companies face intense costs and typically have shorter cash runways. Takeaway While Q3 is expected to see a decline in revenue and production due to increased mining and electricity costs, CIFR’s latest strategies, like that of the Barber Lake acquisition, positions the miner well for future growth. The company's prudent "hold-some, sell-some" strategy with its Bitcoin holdings provides a buffer for short-term liquidity, but investors should remain vigilant about potential dilution from stock-based compensation. Ultimately, the direction of Bitcoin's price will be pivotal to the success of mining stocks, and identifying well-positioned mining stocks like CIFR, and taking long positions, would benefit investors as the Bitcoin market enters the anticipated bull season.
