D.A. Davidson sees a buying opportunity in the current crisis among crypto miners, according to a Friday research note from the investment bank.
Crypto mining stocks have lost about half of their value in the past month because a major fall in the price of bitcoin (BTC) and ether (ETH) has slashed their profit margins.
Access to capital is "all but gone," such that Davidson senior research analyst Christopher Brendler slashed hashrate expectations to only include "current, funded orders" of mining application-specific integrated circuits (ASIC), in his note. Most publicly listed miners cash is made up of "hodled" bitcoin, i.e., crypto they mine and hold on their balance sheets, such that many have seen their treasuries dwindle along with profitability, according to Davidson.
As a result, miners have started selling off their bitcoin holdings to keep their operations going and service their debt. Expansion plans have been put on hold and "dozens of miners are already missing payments on previous rig orders and stand to lose huge deposits," Brendler wrote.
But markets have overpriced these risks, and mining stocks are "actually super attractive," said the analyst, outlining several reasons for optimism in the upcoming quarter. "Even after crushing earnings estimates, there is still more than 100% [upside potential] to our new (much lower) price targets (based on ~5x 2023 EBITDA)," he wrote.
As smaller miners without economies of scale are unable to keep their operations going, competition on the network is dropping, which in turn lowers the cost of mining bitcoin and protects gross margins. A major drop in the price of ASICs could mean that manufacturers are more lenient with payments and that fears of "broken orders" turn out to be overblown.
Marathon Digital (MARA), one of the largest publicly listed miners, is the only firm analyzed by D.A. Davidson that could still struggle to pay for its orders. The investment bank had named the firm its top mining pick for 2022. Earlier this week, MARA said a June 11 storm left its facility in Hardin, Montana, without power, which is likely to be a blow to its monthly hashrate.
Compared to a June 6 note, D.A. Davidson increased its 2022 upside expectations for Core Scientific (CORZ) and Riot Blockchain (RIOT) to 355% and 189%, respectively, and decreased its forecast for Marathon, Hut 8 (HUT), Argo Blockchain (ARBK) and Stronghold Digital Mining (SDIG) to 228%, 175%, 121% and 81%, respectively.
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