Considering the pummeling that Bitcoin has absorbed over the last five months, Bitfarms Ltd. (NASDAQ: BITF) reported respectable 2Q 2022 earnings. The company mined 1,257 Bitcoin in the quarter, 31% more than in 1Q 2022, and generated positive US$18.7 million of adjusted EBITDA in 2Q 2022.
Bitfarms increased its computing (and therefore mining) capacity to 3.6 Exahash per second (EH/s) as of June 30, 2022, up from 2.7 EH/s as of March 31, 2022. Capacity should further increase to 4.2 EH/s and 6.0 EH/s by the end of 3Q 2022 and 4Q 2022, respectively. The 4Q 2022 expected boost is partly due to Bitfarms’ Argentina operations beginning to come online in that period. Reflecting this higher processing capability, Bitfarms mined 500 Bitcoin in July.
Bringing on new mining resources at a juncture when the underlying commodity (Bitcoin) has cratered in price is not an ideal scenario. However, Bitfarms’ low operating cost implies the energizing of incremental computing capacity will enhance profitability. The company’s hydro-based electricity supply translates into a marginal production cost of about US$9,900 per Bitcoin mined.
During 2Q 2022, Bitfarms sold 3,357 of its Bitcoin holdings, raising US$69 million. The company used most of the proceeds to reduce debt. Bitfarms sold an additional 1,623 Bitcoin in July, which cut its holdings to 2,021 digital coins as of July 31.
| (in thousands of US dollars, except for shares outstanding) | 2Q 2022 | 1Q 2022 | 4Q 2021 | 3Q 2021 | 2Q 2021 |
| Revenue | $41,815 | $40,329 | $59,598 | $44,774 | $36,687 |
| Bitcoin Mined | 1,257 | 961 | 1,045 | 1,051 | 759 |
| Implied Bitcoin Price Reflected in Revenue | $33,266 | $41,966 | $57,032 | $42,601 | $48,336 |
| Variable Cost Per Bitcoin Mined | $9,900 | $8,700 | $8,000 | $6,900 | $9,000 |
| Operating Income | ($173,091) | $6,874 | $15,004 | $34,090 | ($2,090) |
| Operating Cash Flow | $48,129 | ($29,232) | ($6,368) | ($13,506) | ($8,860) |
| Capital Expenditures | ($34,087) | ($67,808) | ($60,820) | ($30,257) | ($73,400) |
| Adjusted EBITDA | $18,685 | $21,440 | $44,013 | $31,859 | $23,827 |
| Cash – Period End | $45,982 | $77,294 | $125,595 | $43,267 | $36,216 |
| Number of Bitcoin Owned – Period End | 3,144 | 5,243 | 3,301 | 2,312 | 1,293 |
| Debt – Period End | $123,635 | $152,983 | $84,742 | $77,123 | $21,499 |
| Shares Outstanding (millions) | 206.3 | 201.6 | 194.8 | 174.4 | 162.1 |
A Bitfarms share has lost more than 70% of its value this year, materially worse than the ~54% decline in Bitcoin year to date. At its current share price of US$1.415, the stock may have reached a level where it represents a reasonable speculation. Bitfarms shares could of course decline further if the digital currency were to correct even more, but it would also likely be swept much higher if Bitcoin were to rally — and potentially at a faster pace than Bitcoin.
The table below breaks out Bitfarms’ valuation based on four potential scenarios: Bitcoin prices of US$20,000, US$22,500, US$25,000, and US$27,500.
| (in US dollars) | At Bitcoin Price of US$20,000 | At Bitcoin Price of US$22,500 | At Bitcoin Price of US$25,000 | At Bitcoin Price of US$27,500 |
| 2Q 2022 Actual Adjusted EBITDA | $18,685,000 | $18,685,000 | $18,685,000 | $18,685,000 |
| Implied Bitcoin Price Reflected in 2Q 2022 Actual Adjusted EBITDA | $33,266 | $33,266 | $33,266 | $33,266 |
| Assumed Pro Forma Bitcoin Price in 2Q 2022 | $20,000 | $22,500 | $25,000 | $27,500 |
| Reduction in 2Q 2022 Adjusted EBITDA at Assumed Realized Bitcoin Price | ($16,675,000) | ($13,532,500) | ($10,390,000) | ($7,247,500) |
| Pro Forma 2Q 2022 Adjusted EBITDA | $2,010,000 | $5,152,500 | $8,295,000 | $11,437,500 |
| Annualized Pro Forma Adjusted EBITDA | $8,040,000 | $20,610,000 | $33,180,000 | $45,750,000 |
| Bitfarms Stock Market Value at US$1.415 per share | $292,000,000 | $292,000,000 | $292,000,000 | $292,000,000 |
| Add: Bitfarms Total Debt at 6-30-22 | $123,635,000 | $123,635,000 | $123,635,000 | $123,635,000 |
| Less: Bitfarms Cash at 6-30-22 | ($45,982,000) | ($45,982,000) | ($45,982,000) | ($45,982,000) |
| Less: Value of Bitcoins Held in Custody at Assumed Pro Forma Bitcoin Price | ($62,880,000) | ($70,740,000) | ($78,600,000) | ($86,460,000) |
| Enterprise Value Adjusted for Assumed Value of Bitcoins Held in Custody | $306,773,000 | $298,913,000 | $291,053,000 | $283,193,000 |
| Ratio of Adjusted Enterprise Value to Adjusted Annualized EBITDA | 38.2 | 14.5 | 8.8 | 6.2 |
The baseline data point in all calculations is Bitfarms’ 2Q 2022 adjusted EBITDA of US$18.7 million. This cash flow figure is based on a realized Bitcoin price from its mining operations of US$33,266 (2Q 2022 revenue of US$41.8 million divided by 1,257 Bitcoin mined during the quarter).
If Bitfarms’ realized Bitcoin price had been US$25,000 in the quarter, its pro forma quarterly adjusted EBITDA would have been US$8.3 million, or US$33.2 million on an annualized basis. Bitfarms’ enterprise value (EV), adjusted for this Bitcoin price attached to the 3,144 Bitcoin it held on its balance sheet as of June 30, 2022, is about US$291 million. This implies that if Bitcoin were to reach US$25,000, the ratio of the company’s adjusted EV to its adjusted annualized pro forma EV is a fairly reasonable 8.8x.
Performing the same calculations at a pro forma Bitcoin price of US$27,500 yields an even lower EV-to-EBITDA valuation multiple of 6.2x. Admittedly, if Bitcoin were to decline further to US$20,000, its cash flow valuation multiple would be nearly 40x.
Risk-tolerant investors, especially those with a constructive outlook on Bitcoin, may consider Bitfarms shares. If the digital currency were to stage a rally from depressed levels — or even a noticeable reflex rally — the stock could potentially perform well.
Bitfarms Ltd. last traded at US$1.46 on the NASDAQ.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
