Why Did HUT Go Up?

Bitcoin mining company Hut 8 Mining (NASDAQ:HUT) has been on a massive run in recent weeks. Up over 80 percent in the last 30 days alone, Hut 8 has produced enormous short-term returns for its shareholders and substantially beaten the broader market. So, why did HUT go up?

Why Hut 8 Mining Is on a Run

Hut 8’s recent run has been correlated with a spike in the price of Bitcoin.

Between June 15th and July 10th, Hut 8 soared from $2.07 to $3.94. During the same period, Bitcoin rose from $26,327 to $30,621.

As such, much of Hut 8’s rise appears to reflect an increase in the underlying value of its Bitcoin reserves.

The company held 9,133 Bitcoin as of the most recent quarterly report, making it highly sensitive to the cryptocurrency’s price movements.

Another catalyst for Hut 8’s growth appears to be its planned merger with US Bitcoin. This merger is expected to roughly triple the company’s current installed mining capacity, giving it a hash rate of 7.02EH/s.

Together, the two companies hope to become a central hub of the crypto mining industry. In addition to joint mining activities, the merged business plans to invest heavily in high-performance computing and ASIC miner sales.

Hut 8 Revenue Disappoint YoY

While Hut 8’s stock has been on a tear, the company’s fundamentals have been less than stellar over the past year.

In Q1, total revenue totaled just $19 million, compared to $53.3 million the year before. Due to the increasing difficulty of Bitcoin mining, the company’s quarterly output of Bitcoin also plummeted from 942 a year ago to 475 in the last reported quarter.

Once again, the company’s sensitivity to Bitcoin prices is important to note when examining its revenue. As management highlighted in the quarterly report, Bitcoin’s average daily price declined 41 percent in the trailing 12-month period. In large part, this led directly to the declining revenue Hut 8 reported last quarter.

Net income was a rare bright spot for Hut 8, as income per share rose from $0.33 in Q1 2022 to $0.49. This increase was driven primarily by a non-cash revaluation of the company’s digital assets which totaled nearly $135 million.

This non-cash item, however, obscured a drastic decline in profitability in the company’s core mining business. While mining activities generated $32.9 million in profits in Q1 2022, Hut 8 profited just $2.9 million in Q1 2023.

How High Could HUT Go?

After spiking drastically in the first half of the year, Hut 8 trades far above even the most optimistic analyst price targets.

The median target price for the stock is $1.60, more than 60 percent below the most recent price of $4.17. Even the highest price target is just $3. As such, the market’s bullishness on Hut 8 seems to run contrary to the analyst consensus.

Several of Hut 8’s traditional value metrics also seem to indicate that it is overbought. The company currently trades at nearly 8 times its sales, and the cash flow it produces is minuscule.

Hut 8 does, however, maintain a very low debt level. The company’s debt-to-equity ratio is just 0.07, making its long-term debt load a negligible factor.

In considering Hut 8’s value, however, it’s important to consider how closely tied the company’s value is to that of Bitcoin.

As of the time of this writing, Bitcoin is testing the $32,000 mark for the first time in over a year. A major new bull run in cryptocurrencies could cause the underlying value of Hut 8’s digital assets to skyrocket and solidify the company’s valuation.

What Could Stop HUT In Its Tracks?

Despite Bitcoin’s popularity, many critics suggest that it is more or less worthless. Even if it indeed proves to have intrinsic value, many of Bitcoin’s underlying arguments have been challenged in recent years.

Its purported ability to hedge against inflation, for example, has not held up well in the light of recent inflationary pressures. Because Bitcoin mining is its primary activity, the risks of Hut 8 are inherently connected to the risks of Bitcoin.

A key example of the Bitcoin-related risk to Hut 8 can be found in the company’s capital reserves. Hut 8’s current cash reserve was last reported at just $15.9 million, compared to over $352 million held in digital assets.

Given that the company’s total assets are about $541 million, it’s clear that a drop in Bitcoin prices could be a massive problem for Hut 8’s balance sheet.

Beyond the potential risk of heavy Bitcoin exposure, Hut 8’s falling revenues raise concerns for long-term investors. While the newly merged company emerging from Hut 8 and US Bitcoin will almost certainly see higher revenues as a result of larger scale, the underlying drop in sales from Hut 8’s own operations is a worrying trend that could translate to the combined company.

Is Hut 8 a Buy?

The decision to buy or pass on Hut 8 largely comes down to an individual investor’s view of Bitcoin. With a substantial reserve of the digital currency and a massive increase in mining capacity due to the merger with US Bitcoin, Hut 8 stands to do quite well if the price of Bitcoin moves back toward its past highs.

If a new crypto bull run does not occur, however, the company could be in for a period of stagnant revenues and earnings.

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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.