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Iris Energy Limited (NASDAQ:IREN) recently noted a new 2024 harsh rate of 20 EH/s expected after the purchase of new NVIDIA GPUs, with two data centers to be completed in 2024. Assuming new operating efficiency from artificial intelligence and the double-digit growth of the Bitcoin mining industry, IREN could receive a significant amount of cash from investors to run operations. Yes, there are risks from increases in the price of electricity or changes in the price of Bitcoin, however under my DCF models, IREN does show significant upside potential in the stock price.
Iris Energy
Iris Energy is a company in the IT sector running data storage centers supported 100% by renewable energies. The company’s income comes mainly from Bitcoin mining activity, in addition to transaction fees and various exchange mechanisms towards other types of digital currencies that are backed by traditional currencies.
Source: Business Report
Source: Investor Relations Presentation
The company’s strategy in relation to its assets has been the acquisition of low-cost spaces for the installation of its computing centers, with the condition that they are located near proven renewable energy sources. To date, the company has 4 active storage centers, three of them in Canada and the fourth one in the United States that, despite being active at this time, is under development to expand its mining capabilities.
The company operates all of its Bitcoin mining activities through a single segment. The activities are carried out through high-performance computing centers under its ownership, oriented towards operating with renewable energy unlike traditional companies in this sector. This factor also becomes part of company’s low-cost strategy associated with obtaining properties for the installation of its mining farms.
100% of annual revenue comes from Bitcoin mining, with no other sources of income currently. Iris is analyzing about expanding its business towards offering high computing solutions for other clients, although it is still a statement rather than something that translates into concrete actions. For now, the company’s latest movements refer to small expansions in its feeding capabilities, as well as the development of the project in the United States to improve its performance.
With that about the business model, I believe that the company could receive significant attention in the coming years given the expectations of other analysts. According to the information given by Seeking Alpha, analysts are expecting significant EPS increases in 2024 and 2025.
Source: Seeking Alpha
Growing Amount Of Assets And Cash, And No Financial Debt
I think that the most remarkable thing about the company is the recent increase in the total amount of assets and cash. In December 2023, the company reported $90 million in cash, close to 33% more than that in June 2023. The total amount of property and equipment also increased close to 9%, and total assets stood at about $417 million, about 26% more than that in June 2023.
Source: Investor Relations Presentation
It is worth noting that the company does not report financial debt. With a healthy asset/liability ratio and given the increase in assets, Iris Energy could receive a lot of attention from market participants. As a result, I believe that we could see a decrease in the WACC as the cost of equity may decrease. Under my best-case scenario, I assumed a WACC of 9.5%.
Source: Investor Relations Presentation
The Company Sells The Bitcoin It Mines, Which May Offer Liquidity To Reinvest In Data Centers.
Within Iris’s business strategy, the company seeks to liquidate all Bitcoin values obtained in one day, through the Kraken trading platform, which means that it does not have a positive liquidity balance in this sense. At present, the horizons are set on expanding its revenues into new markets, expanding the offer of high-performance computing services for clients in industrial or technological fields.
To date we have utilized Kraken, a U.S.-based digital asset trading platform, to liquidate the Bitcoin we mine. The mining pools that we utilize for the purposes of our Bitcoin mining transfer the Bitcoin that we have mined to Kraken on a daily basis. Source: Prospectus
Given the recent increase in the mining operations, I would expect a further increase in cash in hand. During the month of March, income in this sense grew by 57%, with a mining average of 7.3 EH/s, currently operating at 8 EH/s.
Source: Investor Relations Presentation
Data Center Expansion Will Most Likely Bring Capacity Increases, And Could Lead To 20 EH/s And Net Income Growth
In 2024, the company noted that Childress Phase 1 and Childress Phase 2 could bring the company’s operating figures to close to 20 EH/s. Optimized data center design could bring better figures than expected, so I believe that many investors will most likely be looking at Iris Energy in the coming years.
Source: Investor Relations Presentation
Among the different figures given recently, I believe that the following table is worth having a look at. With the new projects under construction in Texas, USA, total capacity stands at close to 2.160 MW. Under my best-case scenario, thanks to new capacity, I assumed that receipt from Bitcoin mining will continue to grow at the double-digit.
Source: Investor Relations Presentation
AI Could Also Bring FCF Growth
At the last NVIDIA conference, where top developers of artificial intelligence tools attended, the company was recognized for the capabilities of its data storage centers and an ongoing plan to negotiate to expand to new capacities. There are a lot of analysts noting that AI could help Iris after the purchase of 248 NVIDIA H100 GPUs. Customer negotiations for new capacity are also in progress, so I believe that we could receive further news in the coming months.
Source: Investor Relations Presentation
According to a paper published by The Institute of Electrical and Electronics Engineers, AI could be employed to diminish electricity consumption. Besides, different algorithms could also enhance profit generation. As a result, I believe that Iris Energy could see net income growth thanks to new AI technologies, and the power provided by the new 248 NVIDIA H100 GPUs. In this regard, I invite investors to read the following lines.
AI techniques can be employed by mining pools to choose which cryptocurrency to mine and which mining pool to join in order to reduce the electricity consumption and increase their profit based on historical data – Source
I also found out that Iris Energy could be using the 248 NVIDIA H100 GPUs to select mining pools, and make forecasts about the value of the block reward. There is also a lot of research done about the price prediction of cryptocurrencies using AI techniques.
They learned from data obtained from mining with 5 pools (AntPool, F2Pool, BTC.com, SlushPool and BatPool) for 40 consecutive days using AntMiner S5. The data included parameters related to the mining pools (e.g. hash distribution and reward sharing method) and other parameters specific to the miner (e.g. its hash rate and electricity cost) in addition to the current value of the currency and the value of the block reward. They concluded that their prospect theoretic approach predicted their profits more accurately than the expected utility approach. Source: Cryptocurrencies and Artificial Intelligence: Challenges and Opportunities, in IEEE Access, vol. 8, pp.
The global Bitcoin Miner Market is expected to grow at close to 26.7% CAGR from now to 2029. Besides, the global artificial intelligence market is expected to grow at close to 28% CAGR. With these numbers in mind, I believe that Iris Energy could experience FCF growth or net income growth close to these figures. Under my best-case scenario, median receipt from Bitcoin mining activities stood at close to 14%.
The global Bitcoin Miner market, valued at US$ 11,546.70 million in 2022, is projected to reach US$ 23,842.76 million by the end of 2029, exhibiting a robust CAGR of 26.7% between 2023 and 2029. Source: Intel Market Research
The market size is expected to show an annual growth rate (CAGR 2024-2030) of 28.46%, resulting in a market volume of US$826.70bn by 2030. Source: Statista
Under My Best-Case Scenario, I Obtained Price/NAV Of 0.87x And Price Target Of $13 Per Share
Under my best-case scenario, I assumed further increase in capacity higher than 20 EH/s from now to 2034. I also took into account the expected increase in the Bitcoin mining market and the current amount of cash, which may serve for further development of data centers. With other analysts expecting positive FCF in 2025 and 2026 FCF of close to $212 million.
I believe that my figures are quite conservative. Also, note that I tried to use the same cash flow statement structure seen in the company’s 20-F report.
Source: Seeking Alpha
Source: 20-F
Under my best-case scenario, I assumed receipts from Bitcoin to be close to $460 million with 2034 growth close to 7%, and median receipts from Bitcoin growth from 2024 to 2034 were also assumed to be close to 14%.
2034 payments for electricity, suppliers, and employees are projected to be close to -$10 million, with $0.1 million in interest received, accompanied by $0.1 million in other income received. With this information, a CFO of $449 million is estimated. By deducting the capex of around $20 million, 2034 FCF close to $429 million is obtained.
Source: Financial Expectations
For the assessment of the valuation, I used the Price/NAV multiple, which appears to be one of the most remarkable multiples used these days in the Bitcoin industry. Under this case scenario, I obtained a price/NAV close to 0.87x with a WACC of 9.5%. The WACC is not far from the estimate used by other analysts.
In crypto mining company valuation, P/NAV is the single most significant valuation statistic. The “net asset value” of a mining asset is its discounted future cash flows less its debt and cash on hand, also known as its net present value. Source
Additionally, I made a model with a terminal multiple close to 8x, a WACC of 9.5%, and assuming net debt of close to -$90 million. The results include EV of $1.9 billion. The equity valuation would stand at $1.9 billion. Now, dividing the equity by 141 million shares outstanding, the implied fair price would be close to $13.5 per share.
Source: My Expectations
The Price/NAV Under My Worst-Case Scenario Could Reach 3x, And The Price Target Would Be $2.1
Under this case scenario, I used 2034 receipts from Bitcoin of $189 million, reflecting growth of -5%. When analyzing previous years, it is observed that the median growth is 7%.
Payments for electricity, suppliers, and employees are projected to be close to -$61 million, while around $0.6 million in interest received is expected, accompanied by $2 million in other income received. Additionally, interest paid is expected to be not less than -$4 million.
With this information, a CFO of $125 million is estimated. By deducting the capex of around $20 million, FCF close to $105 million is obtained.
Source: Financial Expectations
With a EV/FCF multiple of 7.9x, and a WACC of 10%, the equity would be close to $322 million. Dividing the equity by 141 million shares, the fair price per share would be $2.1. I also obtained a P/NAV close to 3x.
Source: My Financial Expectations
Competitors
Within the Bitcoin mining market, there are many types of participants, from large numbers of individuals to major companies with activity and size similar to that of Iris. Bitfarms (BITF), Cipher Mining (CIFR), CleanSpark (CLSK), Hive Digital Technologies (HIVE), Hut 8 Mining Corp, Marathon Digital Holdings, Inc (MARA), Riot Platforms (RIOT), and TeraWulf (WULF) are the main competitors in this sector in terms of domestic positions within the United States and North America.
On the other hand, the high-performance computer industry is occupied by CoreWeave, FluidStack Ltd, Lambda Inc, Applied Digital Corporation (APLD), and RunPod Inc. It must be considered that Iris is not directly providing services, rather it intends to guide part of the business in this sense.
Risks
Without a doubt, the fact that all of its income comes from Bitcoin mining suggests some risks in the collection regarding variations in the exchange rate, even when the company has its strategies to cover itself in this regard.
On the other hand, of course, any serious disruption in the activity of this currency, regulations, price drops, or complications with Kraken, the trading platform used to change it to stable currencies, can generate complications for the company. Along with this, any possible disruption in its storage centers must be noted.
The risks related to the foreign origin of the company and the legal conditions in which this activity is framed must not be taken for granted within this analysis, mainly regarding the tax situation in relation to the company and its reports in the SEC.
Finally, changes in labor law, increases in the price of electricity, or lower receipts from Bitcoin than expected could bring lower FCF growth than expected. As a result, I believe that analysts may lower their expectations, which may lower the implied stock valuation of Iris Energy.
Conclusion
Considering recent expectations with respect to data center expansion, the target hash rate given of 20 EH/s expected for 2024, and the growth of the Bitcoin mining industry, Iris Energy could experience significant business growth. Also, assuming operating efficiency increases thanks to AI after the purchase of 248 NVIDIA H100 GPUs, I believe that future FCF growth and hash rate could accelerate in the coming years. Yes, there are risks coming from changes in the price of Bitcoin, changes in the labor law, or higher prices of electricity. However, I believe that there is more upside potential than downside risk in the current stock valuation.
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