CleanSpark: Well Positioned For The Future

Summary CleanSpark reported a 15% increase in revenue in Q3, with full-year revenue slightly missing expectations. The company had a larger than anticipated operating loss due in part to a depreciation charge related to out-of-service miners. CleanSpark has seen an 82% increase in stock price in the last month and is on track for a strong fourth quarter for revenue. In my view, management has navigated crypto winter well and is heading into the halving with right tools. I last covered CleanSpark ( CLSK ) for Seeking Alpha in late August. At that time, the company was operating 9 EH/s and the stock was trading a little under $6 per share. In response to the release of the company's full 2023 fiscal year performance, the stock has been absolutely ripping. As of article submission, CLSK shares are trading for well over $7. In this update, we'll look at some key takeaways from the quarter ended September 30th, as well as November production figures, and some additional considerations with 5 months remaining until the dreaded Bitcoin ( BTC-USD ) block reward halving. Earnings Reaction In calendar year Q3, CleanSpark reported a sequential increase in revenue of 15% from $45.5 million to $52.5 million. Full year revenue came in at $168.4 million which was slightly below what some analysts were expecting. At 47% quarter over quarter, cost of revenues actually grew faster than revenue. While down sequentially, year over year gross profit grew from $9.5 to $22.1 million. Growth in total opex was large. CleanSpark saw a 20% year over year increase in SG&A and a 255% increase in depreciation and amortization. CleanSpark Operating Income (Seeking Alpha) For the quarter, operating income was negative $61 million. After two quarters of improvement in operating income, this result is disappointing. But it should be noted that the company ate a $32.7 million depreciation charge related to out of service older miners in preparation for the halving. Interestingly, the market largely shrugged off the operating loss. Data by YCharts CLSK shares are up 82% in the last month. Furthermore, this rally has continued even after earnings that I'd view as fairly negative and a 22% increase in shares outstanding over the prior quarter. The optimism in the Bitcoin mining space isn't limited to just CleanSpark. Sector Performance (Seeking Alpha) But while many of these stocks have moved by as much as 200 to 300% year to date, CLSK has been the top performer over the last month and over the last six months. In addition to guidance for exahash growth, what I have personally liked about CleanSpark specifically is the company's Bitcoin treasury management strategy this year. Production & HODL Approach Shortly after releasing earnings, CleanSpark also dropped November production results on the market. In November, the company mined a record 666 BTC. Of that production, CleanSpark sold 402 BTC at an average price of $36.6k. This comes after management sold 562 BTC in October at an average price of $28.6k. Combining those two months of BTC sales, CleanSpark already has $30.8 million in calendar Q4 revenue which is ahead of last year's revenue result for the entire quarter. And again, we still have a full month of production remaining and BTC is flirting with $40k. BTC Treasury (Author Chart via CleanSpark Disclosures) Despite these BTC sales in October and November, CleanSpark has managed to grow HODL stack for 9 consecutive months and currently holds 2,575 BTC. At an article submission Bitcoin price of $38.8k, CleanSpark's BTC treasury has a fair value of just under $100 million. This is capital that the company can put to use for expansion or hold for price appreciation. On the conference call, CEO Zach Bradford seemed to indicate the company will take a balanced approach from here: You'll notice that we grew our balance swiftly over the last few months. We did this to strategically boost the balance, as we sense price improvement was on the horizon. We expect to continue to grow our Bitcoin treasury, but we have shifted back to a strategy of using our Bitcoin for expenses and holding the difference. This approach to treasury management is in stark contrast to total production liquidation that we see from some of the other fast-growing mining companies. It is my personal view that the balanced approach will prove the better strategy, especially post-halving. On The Halving At this point, I feel I've mentioned the halving as a looming risk for Bitcoin miners in about a dozen different BTC miner articles. If the equity market hasn't priced this event in at this point, I'd be very surprised. What is yet unknowable is to what degree the transaction fee market for Bitcoin will be sticky in the future. We saw an example of transaction fees spike as a percentage of the Bitcoin block reward back in May. That spike was short-lived and returned to historical norms by the summer. Transaction Fee Percentage (HashRateIndex) In November, we saw that fee market move up again and this time it appears to be less of a flash in the pan and more sustained. Rather than observing a dramatic spike that takes transaction fees to 75% of total block reward for a brief period of time like we saw in May, we've seen virtually an entire month of the transaction fee share of block reward above 10%. BTC Transaction Fees (Author Chart via IntoTheBlock Data) It arguably hasn't come with as much fanfare, but the total BTC paid to miners from transaction fees in November was only 15% below that of May. If this continues, we may see surprise upsides to revenue in Q4. Of course, the counter to this is the fact that as mining revenue increases with more transaction fees, global hash rate will also increase as more market participants want to compete for the reward. We're clearly seeing that story play out as well: Data by YCharts It's admittedly been volatile, but the long term trend is very clear. There is increasing competition for BTC mining whether it comes from fees or fresh supply. No matter how high hash rate gets, fresh BTC emissions will not increase with hash. In fact, the supply is designed to decrease. This is the major risk to every Bitcoin miner both private and public and it's why I've tried to highlight the importance of transaction fees going forward. From my February Bitcoin article discussing the emergence of Ordinals on Bitcoin's block space: If the Bitcoiners who don't like the Ordinals project want to stop what they view as network spam with a true free market solution, they're going to have to start using the base layer chain more and be willing to pay transaction fees that are large enough to incentivize miners choosing their transactions as the priority. Miner incentives are everything. In my view, you can't possibly be bullish Bitcoin long term and accept that miners are going to secure the network out of the goodness of their hearts. Miner Profitability (BitInfoCharts) It is currently more profitable to mine Bitcoin than it was at this time last year. But the longer term trend is still horrendous. In my opinion, it's more likely that we'll see BTC's price appreciation alleviate this problem post-halving than transaction fees next year. That means miners with the right mix of both production and HODL stack will outperform the ones that can't keep up with global hash growth. CleanSpark is currently my top miner holding. Final Thoughts At the end of the quarter, CleanSpark had $761.6 million in total assets and just $74.1 million in total liabilities. The company has clearly been funding growth with dilution and that has been a risk that I've pointed out in previous coverage. CEO Zach Bradford has indicated that the company will start using BTC for expenses again. The only question is what will the price of BTC be when CleanSpark makes those sales. Personally, I think CleanSpark has done a nice job navigating crypto winter and I think it's an essential holding for the upcoming Bitcoin bull run. That said, don't forget to take some profit along the way and manage positions responsibly.