Brief Breakdown: Bitfarms Ltd. (NASDAQ: BITF)
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Company Description and Qualitative Analysis
Bitfarms Ltd. is a blockchain infrastructure company that operates blockchain computing centers to power the global decentralized financial economy of Bitcoin. Bitfarms provides computing power to the Bitcoin network and earns fees from each network for securing and processing transactions. Bitfarms uses primarily hydroelectrity and currently has five facilities in Quebec, Canada. Recently, Bitfarms entered into a $32 million equipment financing agreement for additional bitcoin mining equipment provided by BlockFi Lending LLC and also secured 60,000 new-generation miners in 2021. Bitfarms became the first bitcoin mining company to go public in July 2019.
Quantitative Analysis
At the time of this writing (2/26/2022), BITF is trading at $3.29 with a 52 week range of $2.75 - $9.36 and a market cap of $615.97M USD. In Q3 of 2021, they posted $44.8 million in revenue which was up 22% from the previous quarter and 559% year-over-year. Bitfarms achieved a record net income of $23.7 million or $0.13 per fully diluted share compared to the net loss of $3.7 million or $0.02 per basic share. BITF also increased gross mining margin to 82% up from 79% from the previous quarter. This financial analysis was done using financialstockdata.com (sign up using our promo code GCI here). You can view BITF’s last quarterly earnings here and latest 10K here. Below we have percent returns for Bitfarms versus returns for Marathon Digital Holdings Inc. (ticker: MARA) and Hut 8 Mining (ticker: HUT).
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Bullish Thesis
Here are three points to support the bullish thesis:
Global distribution of mining: Bitfarms currently operates 5 mining centers in Quebec, 1 in Washington state (U.S.), and 1 in Villarica, Paraguay. They have plans to expand operations in Quebec and add an additional center in Córdoba, Argentina. Geopolitical instability and regulatory uncertainty could be disastrous for miners too concentrated in a single country. Although Canada has taken a positive stance toward the bitcoin mining industry over the last several years, recent events in the country make me somewhat skeptical about how they will treat the industry going forward. Bitfarms already has a global footprint and, based on their outlook, plans to further distribute their operation in the future, alleviating their exposure to the risk of instability arising in a single country. I also love that they’re expanding in the Latin American market - these countries have been very receptive to Bitcoin over the last year, have abundant natural resources, and would likely be open to the job growth and tax revenues new bitcoin mining centers would bring.
Major expansions in 2022: Bitfarms is projecting an expansion of their Megawatt capacity across all mining centers from 106MW to 394MW in 2022. This increased capacity comes from expansions on existing mining farms as well as construction on their new facility in Argentina. The Argentina facility alone is expected to expand their capacity by 210MW. On February 25th, 2022, Bitfarms announced a financing deal with BlockFi for $32M. Per the terms of the agreement, Bitfarms entered into an equipment loan for the recent purchase of 6,100 Bitmain S19j Pro miners for a total of $32M. All of these moves signal a dedication to growth, particularly throughout 2022.
Vertical integration: Vertical integration has become a major point of focus for many technology companies over the last two years, largely in response to supply chain disruptions. Bitfarms has reduced their reliance on third parties in a number of ways. First, their electrical contractor, Volta Électrique, is 100%-owned as a subsidiary. This greatly reduces construction costs and can generate revenue. Second, Bitfarms serves as an authorized MicroBT repair center, which shortens downtime due to equipment malfunction and can also be leveraged as a profit center. Finally, Bitfarms relies on their own proprietary software to monitor and optimize mining performance - they rebuilt their in-house software last year to ensure scalability in 2022.
Bearish Thesis
Here are three points to support the bearish thesis:
Computing Power Dedicated to Altcoins: Currently Bitfarms owns and operates blockchain “farms” that provide computing power to various crypto networks such as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Dash. Although they are a major player in the bitcoin mining industry, I do not like seeing companies get into altcoins because of the uncertain nature of them going forward. For companies early in their lifecycle, which many bitcoin miners are, I would like to see companies that have a primary focus on bitcoin and strictly bitcoin.
Senior Managers Selling Stock: Sometimes when a company goes public, many who were initially in the company sell their stock to make a significant profit. When insiders trade a stock after it reaches new highs and it has passed the initial IPO offering, investors should take note and this is one of those times for Bitfarms. Six key insiders have recently sold stock and due to the amount and the seemingly coordinated sell-off, it seems the insiders may know something that is on the horizon for the company that others do not.
Canadian Government Uncertainty: The vast majority of the Bitfarms mining operation is in Canada and currently the Canadian Trucking Convoy is causing a rift with the Canadian government. The Canadian government has frozen bank accounts associated with crypto donations and has not encouraged self-custody of bitcoin and other crypto assets. The crackdown of bitcoin and crypto should be worrisome for a company that is strictly in on mining of these assets in this country. Currently, BITF is building new facilities in Latin American countries but until those facilities are done the political climate in Canada should be something to monitor.
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Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.