Is Cleanspark Stock A Buy?

Bitcoin miner CleanSpark (NASDAQ:CLSK) has been among the top-performing stocks of the past year with its shares advancing by nearly 600%.

Like Bitcoin itself, the price of publicly traded Bitcoin mining companies is prone to wild fluctuations, and it can often be difficult for investors to know when they should buy or sell.

Does CleanSpark still have room to run, or has the stock already peaked?

CleanSpark Has Recently Achieved Profitability

Despite the massive advance in its share prices over the last 12 months, CleanSpark has only just managed to become profitable.

In the trailing 12-month period, the company lost $136.6 million, nearly equivalent to its total revenues of $168.4 million.

That loss rate, however, turned around toward the end of last year. In Q4, CleanSpark reported net income of $25.6 million, a major improvement from the loss of $29.0 million it had reported in the year-ago quarter. This result came as the company’s mining capacity continued to grow toward its stated goal of 50 exahashes per second.

CleanSpark’s move toward profitability was also supported by a surge in Bitcoin prices, which have more than doubled in the last year.

Even though CleanSpark is profitable now, investors will likely want to see more stable earnings growth from the company.

With the company’s ability to generate positive net income so heavily tied to the price of the Bitcoin it mines, it’s far from impossible that earnings could be unstable until CleanSpark further increases its mining capabilities.

Revenue Is Rising Rapidly

Arguably the most positive aspect of CleanSpark’s outlook is its fast-growing revenue. In 2019, CleanSpark was bringing in just $1 million per quarter.

Fast forward to today, and that number has skyrocketed to $74 million. This massive increase in revenue has been impressive, to say the least.

Even more positive for the company is the fact that analysts foresee a rapid rate of revenue growth continuing into the future. In the coming year, for example, it is projected at 58.3%.

Valuation Leaves Little Room for Upside

In addition to its somewhat uncertain fundamentals, CleanSpark is also priced at a level that may not leave much room for share prices to move higher.

CleanSpark shares trade at 19.4x sales and 3.9x book value, both of which are fairly steep multiples for a company that is only achieving modest profitability. This may well prove to be an impediment to CLSK shares rising significantly beyond their present level.

Even with a majority buy rating issued for the stock, analysts broadly see limited upside potential in CleanSpark over the coming 12 months. The average target price for the company’s shares is currently $16.38, just below the most recent price.

Though it’s worth noting that a few analysts have recently revised their price forecasts for CLSK upward, it’s difficult to see the stock significantly beating the broader market over the next year.

Bitcoin Mining Stocks Are Inherently Risky

CleanSpark’s small profits and high valuation are further compounded by the inherent risks it faces as a Bitcoin miner. The cryptocurrency is notoriously volatile, and the market is still trying to determine what, if anything, its true value is.

The most bearish voices, including notables like Warren Buffett and Jamie Dimon, believe Bitcoin to be intrinsically worthless and propped up entirely by speculative trading. On the other end of the spectrum, bulls like Cathie Wood predict that Bitcoin prices could skyrocket to $1 million or more by the end of the decade.

Beyond the ordinary risks of investments tied to the highly volatile cryptocurrency world, bitcoin mining stocks like CLSK face additional risks in 2024. Chief among these is the emergence of spot Bitcoin ETFs that allow investors to directly track the price of Bitcoin without actively owning the cryptocurrency.

These ETFs are likely to dampen investors’ appetite for Bitcoin mining stocks, as up to now these have been used as proxies for Bitcoin itself. With a simpler, price-based investment option now available, investors may be less inclined to continue driving up the multiples of companies like CleanSpark by pouring money into them.

Another problem digital mining companies face this year is the upcoming Bitcoin halving event that will take place in April. When this occurs, the block rewards paid to miners will be reduced by 50%.

This will significantly disadvantage Bitcoin miners across the board, not just CleanSpark. As the rewards for operating and maintaining expensive mining equipment dwindle, Bitcoin prices will have to reach higher and higher levels for mining to remain economical.

Is CleanSpark Stock a Buy?

According to 6 analysts, CleanSpark stock is not a good buy with 7.1% downside risk to fair value of $18.87 from present levels.

While the company is now profitable and future quarters may well bring higher earnings if the price of Bitcoin remains elevated, investors are paying a significant premium for a company that is tied to a famously unpredictable asset.

With the underlying asset that CLSK produces being so difficult to value, there is a substantial possibility that investors are paying too much for the stock. This is especially true in light of the current developments in the Bitcoin ecosystem.

A related issue could arise for CleanSpark if the price of Bitcoin doesn’t continue to rise as expected. Bitcoin has already been through several boom-and-bust cycles over many years, and it’s entirely possible that the same cycle could repeat itself.

As of Q4 reporting, CleanSpark held $48.5 million in cash and $127 million in Bitcoin. Keeping so much of its financial reserves in Bitcoin could prove problematic if the digital currency goes through yet another bust. In such an event, CleanSpark could lose a significant amount of its total reserve and be left in a much weaker financial position.

Overall, CleanSpark’s risk profile likely makes it too unstable for most investors to consider seriously. Those who are bullish on Bitcoin can now invest in spot ETFs, significantly diminishing the appeal of mining stocks like CLSK.

Investors who are more conservative, on the other hand, will likely find CleanSpark too risky. Though the stock very well might go higher, the unpredictability of the company’s future earnings and cash flows makes CLSK largely speculative.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.