Cipher Mining Inc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Cipher Mining Inc is a cryptocurrency technology company that is focused on developing and operating data centers for bitcoin mining, and provides hosting, colocation, and related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cipher Mining, while operating in a rapidly evolving industry, lacks a significant economic moat, exhibiting only moderate brand recognition, a basic network effect, and no clear cost or scale advantages. Its balance sheet, while not alarming, is far from pristine and suggests a need for careful evaluation.

Business Overview

Cipher Mining Inc., (referred to as “Cipher” or the “Company”) is a bitcoin mining company focused on developing and operating industrial-scale bitcoin mining data centers. The company engages in the business of developing and operating data centers, providing hosting and colocation services for mining customers, and mining bitcoin using its own infrastructure.

The company’s operations are heavily reliant on the price of Bitcoin and the demand for digital assets.

Cipher is one of several public bitcoin mining companies that are competing to have a share in the bitcoin mining network and are susceptible to wild fluctuations in bitcoin price. The long-term viability depends heavily on Bitcoin price and the company’s operational efficiencies.

Revenue Distribution

Cipher’s revenue is primarily derived from:

  • Bitcoin mining revenue, from the Bitcoin mined using its own infrastructure.
  • Hosting revenue, which results from fees collected from customers for data center hosting services.
  • Colocation revenue which results from fees associated with infrastructure access and data center location-related services.

The cryptocurrency mining industry is characterized by:

  • High Volatility: Bitcoin prices are inherently volatile, directly impacting revenues and profitability of mining companies.
  • Regulatory Uncertainty: Government regulations are constantly evolving, creating a dynamic environment for bitcoin miners.
  • Technological Change: Rapid improvements in mining technologies, especially specialized chips or ASIC (Application Specific Integrated Circuit), require large investments and make equipment obsolete rather quickly.
  • Increasing Competition: The sector is becoming increasingly competitive, with new players entering the space and existing companies growing rapidly.
  • Environmental Scrutiny: Large energy consumption and sustainability issues are getting attention from local and global regulations and authorities making it even more difficult for mining operations to navigate.

Competitive Landscape

Cipher faces competition from other large and small public and private bitcoin mining companies, both in the U.S. and overseas. The industry structure is fragmented, with several large players and numerous smaller ones vying for market share. Competitiveness is mainly on operational efficiencies and electricity costs, along with some geographical and operational considerations.

What Makes Cipher Different?

  • Focus on Sustainable Mining: Company has stated that its focus is on renewable energy and operational efficiency to ensure that its business has a reduced environmental footprint, which is becoming increasingly critical in the industry.

“We are not a company that will be profitable at all costs,” they claim.

  • Data Center Design: Cipher is vertically integrated in building its data centers, giving greater control on design, cost and timelines.

Although, the company has stated that their main focus is on “green” energy, all of their data centers run on electricity, and their operations are completely reliant on the price of power and the cost of electricity.

Financial Analysis

Here’s an in-depth look at Cipher’s financials:

  • Balance Sheet Health:
    • Assets:

    As of December 31, 2023, total assets stood at $569.1 million, with the largest portion coming from property, plant, and equipment (PP&E) at $448 million.

    • Liabilities:

    Total liabilities were $217 million, including long-term debt which is at $82 million and a short-term facility at $135.1 million. The short-term facility was amended in March 2024 to extend the maturity to May 2025.

    • Equity: Total stockholders’ equity was $352.1 million

While the balance sheet does not reveal any impending risks, the company must continue to make large capital investments to grow and keep up with the latest mining equipment and facilities which may cause debt to increase in the future.

  • Income Statement

The company’s operations have been a volatile, as expected with Bitcoin price fluctuations, with revenues of $117 million for the first 9 months of 2024 and $72.5 million for 2023. The company has not been profitable with losses of roughly $93.5 million (loss per share: $0.48) and $151 million (loss per share $0.83) for the mentioned periods, respectively. Gross profit was $15.7 and 2.9 million respectively. Interest expenses have also been a cause of concern.

With no clear visibility on Bitcoin prices and increasing competition in mining, this could negatively affect the business in future.

  • Cash flow: For the period ending September 30, 2024 Cipher has generated a negative $156.5 cash from operations, due to net losses. This signals that current operations are unable to provide internal financing and the company might need further external financing. There are currently no positive free cash flows.

Moat Rating: 2 / 5

Cipher Mining possesses a narrow moat, with some, but not deep or wide competitive advantages.

  • Brand Recognition: The company has some brand recognition among those familiar with bitcoin mining companies, but it is not very strong and does not provide much value. A brand that would bring real pricing power is not present in this industry.
  • Network Effect: While the cryptocurrency space has network effect benefits, Cipher does not enjoy it to an extensive level as it does not have direct control over the blockchain network, or a large number of customers who create network benefits.
  • Cost Advantages/Scale: Cipher is focused on cost management by using renewable sources and reducing electricity costs, but these advantages are also easily replicable. While their size is moderately large, it does not provide significant economic scale to compete with larger mining companies.
  • Switching Costs/Intangible Assets: This company does not have any real switching costs nor intangible assets that could set apart the business from competition.

Risks That Could Harm the Moat and Business Resilience

  • Bitcoin price risk: The largest threat to this company and every other bitcoin miner is the volatility of bitcoin price. A steep decline would be devastating for the company.
  • Regulatory Risk: The regulatory environment around cryptocurrencies is highly uncertain, and negative policy changes could dramatically affect Cipher. This could mean restrictions on the ability to mine, hold, trade, or sell bitcoin.
  • Technological Change: The highly competitive environment in chip manufacturing could make Cipher’s mining equipment obsolete before the amortization period. This poses a considerable risk.
  • Operational Issues: Any major disruptions to operations can immediately result in losses.
  • Electricity Costs: A rise in electricity costs will directly impact profitability and lower the effectiveness of the economic moat.
  • Customer Concentration: Although Cipher offers colocation, hosting, and mining activities, their revenues from colocation and hosting could be affected if there is significant customer churn or if one of their key customer leaves.
  • Debt burden and negative FCF: With no free cash flow the company is exposed to external financing, which increases financial risk and reduces its options.
  • Competition: It has increasing competition from similar companies in the same markets or new competitors. It is particularly vulnerable in commodity-like industries such as bitcoin mining, where competition can be fierce and fast-paced.

Understandability: 3 / 5

Cipher Mining is understandable to those familiar with the cryptocurrency industry, but its unique business model and the interplay of various aspects of its balance sheet and financial structure make it difficult to form a complete understanding. Its dependence on bitcoin prices also adds a complicated element.

Balance Sheet Health: 3 / 5

The company’s assets and liabilities are mostly balanced, however, there are high risks due to low cash and high debt levels, and losses in operations.

The high level of debt and no free cash flow may be concerning. Cipher requires careful monitoring of its balance sheet and funding options.

Recent Concerns/Controversies/Problems

In August 2023 the company filed for a mixed shelf registration for debt, warrants, and stock and warrants to potentially raise capital to help address debt issues. They are looking to raise $400 Million, with the aim to cover financial expenses, acquisition, growth and operating expenses. The company has been facing negative free cash flows. In Q2 2024, the company’s mining revenue did not meet its cost of revenue (negative gross profit). This trend is concerning.

Conclusion: Cipher Mining is a relatively young company operating in a volatile industry. It needs to show its prowess in navigating through regulatory uncertainty, maintaining operational efficiencies, and managing financial risks and obligations to be able to fully capitalize on any future growth opportunities. While their aim is to utilize ‘clean’ energy, they are still largely dependent on the price of energy. The company might be a good investment for a specific investor profile who believes in the long term future of Bitcoin and has the appetite for highly speculative investments with significant chances of losing their investments and has the required financial literacy to understand the risk profiles, but, for the common investor, it is a very high-risk investment.