Core Scientific, Inc.

Moat: 1/5

Understandability: 4/5

Balance Sheet Health: 1/5

Core Scientific is a large-scale digital asset mining company focused on bitcoin mining, and a provider of infrastructure, software, and hosting solutions to other mining and related industries.

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.

Business Overview

Core Scientific is a key player in the digital asset mining sector, specifically focused on Bitcoin mining. Their operations span across several states in North America, and they are a major Bitcoin miner in North America. Additionally, they provide digital infrastructure, software, and hosting solutions for other mining clients. Their business model is quite simple, they buy expensive hardware (mostly ASIC mining machines), house these hardware in their facilities where they are kept functional (and cooled), provide required energy, then use specialized software to connect these machines to a bitcoin mining pool. They then receive a small percentage of the revenue for the mined bitcoin. The company primarily derives its revenue from two segments:

  1. Digital Asset Mining: This segment involves the operation of their own mining equipment to produce and earn bitcoin.
  2. Hosting: This segment involves providing housing, power, and infrastructure services to third-party mining companies, allowing them to operate their mining machines in Core Scientific’s facilities. This segment also includes revenue from maintenance, and other services.

The company’s main strategic focus is to mine bitcoin and to provide infrastructure for others to participate in the Bitcoin network. The company was involved in chapter 11 bankruptcy but has since emerged. Core Scientific has shifted its strategy to a self-hosting model to control the costs, they are now focusing on maintaining a low operational expense.

The cryptocurrency mining industry is intensely competitive and subject to rapid technological advancements. Here are some key observations:

  • The price of bitcoin is extremely volatile, leading to volatile revenue for mining companies.
  • The difficulty of bitcoin mining is constantly increasing, making it necessary for companies to upgrade their equipment regularly.
  • The need for large-scale, energy-efficient facilities is becoming increasingly important for companies to remain competitive.
  • The industry is subject to changing regulatory environments, and that has been a major theme throughout 2022, 2023, and 2024, particularly in the United States.
  • The recent trend of publicly held bitcoin miners moving to a self-mining model to gain more control over operations and margins, or going private to optimize for value.
  • Competition is intense and includes many large players as well as smaller privately-owned miners, and the competition for cheap and reliable power is increasing, along with the number of available qualified staff.
  • The major change underway is the implementation of the Ethereum blockchain’s move from Proof of Work to Proof of Stake, which has a major impact on operations for Ethereum miners. However, this does not affect Bitcoin mining, Core’s core business.

Core Scientific is different from its competitors because of its size and scale, and the company has one of the largest bitcoin hosting businesses in North America. Some of Core’s publicly held competitors in the Bitcoin mining space include Marathon Digital, Riot, CleanSpark, and Bitfarms. However, most digital mining companies are not publicly traded. Core Scientific has the challenge of remaining profitable and expanding in an ever-changing industry while also complying with regulatory demands and legal issues. The company aims for a flexible, capital-light operating model.

Financials in Detail

Analyzing Core Scientific’s financials, particularly recent results, shows a challenging but complex situation. Here’s a breakdown:

Revenues:

  • Core Scientific’s consolidated revenues for the three months ended September 30, 2023 and 2022 were $103 million and $164.4 million, respectively. The company’s digital asset mining revenues for these periods were $80 million and $146.7 million, respectively.
  • Core Scientific’s consolidated revenues for the nine months ended September 30, 2023 and 2022 were $294 million and $499.1 million, respectively. The company’s digital asset mining revenues for the periods were $227.5 million and $435.1 million, respectively.
  • Revenue from hosting is roughly equal for the mentioned periods.

Revenue has significantly decreased over the last year, mainly driven by decreased Bitcoin prices, more than a 45% drop in Bitcoin production, increased energy costs, and the reorganization process.

Profitability:

  • The company reported a net loss of $303.7 million for the three months ended September 30, 2023 and $434.7 million for 2022. For the nine months ended September 30, 2023 and 2022, the company recorded net losses of $1.06 billion and $1.36 billion, respectively.
  • Gross profit for the three months ended September 30, 2023 and 2022 was $19.5 million and $65.7 million respectively.
  • Gross profit for the nine months ended September 30, 2023 and 2022 were $79 million and $175.2 million.
  • Operating expenses have decreased significantly over the past year.

Profitability is highly reliant on the price of Bitcoin and is currently in negative territory, which makes Core Scientific’s business risky.

Balance Sheet:

  • Core Scientific’s balance sheet is very weak, mainly due to its recent bankruptcy.
  • As of September 30, 2023, cash and cash equivalents were only $37.6 million, which is insufficient to cover its debt.
  • The Company had total liabilities of $1.42 billion compared to total assets of $1.43 billion, as of the end of September 2023.
  • A large portion of the assets is attributed to the digital asset mining sector.
  • The company was able to raise $302 million during the restructuring period from their investors.
  • Core has a large amount of short-term debt, with a total debt of around 470 million, and significant repayment is scheduled over the coming 12 months.

Core’s balance sheet is unhealthy with liabilities almost equal to total assets, large repayments upcoming for debt, and low cash levels. The company’s solvency is under question if there isn’t a continued increase in the price of Bitcoin.

Other Considerations

  • In November 2022, Core Scientific filed for Chapter 11 bankruptcy. However, they successfully completed the financial restructuring process, and emerged from bankruptcy in January 2023.
  • Due to rising energy costs and low bitcoin prices, Core Scientific implemented a new self-mining model in the fourth quarter of 2022. This led to a significant decrease in the number of bitcoin mined in early 2023, after which, there has been a significant improvement.
  • A major portion of operating expenses were related to the legal and professional fees associated with the restructuring process.
  • In July 2023, the company began settling lawsuits with creditors, and reached an agreement with CoreWeave, to host GPU miners and AI computing services, however, some contracts were terminated.
  • Going forward, the management is focusing on reducing liabilities and improving revenues, and focusing on data centers, particularly for AI services.

Understandability Rating: 4 / 5

  • The core business model of mining bitcoin and offering hosting services is relatively straightforward. However, the company’s recent struggles, the changing landscape of the digital currency world, accounting methods used by the company, and the complex financial engineering of the company do add to the complexity and make it more difficult to understand. A good understanding of financial terms is also essential in understanding the dynamics of the business.

Moat Rating: 1 / 5

Core Scientific does not appear to have an economic moat and is highly susceptible to market fluctuations and competition. Here are the reasons for the low moat rating:

  • Lack of Sustainable Competitive Advantage:
    • While they have one of the largest mining infrastructures in North America, they lack barriers to entry, and their competitive advantage is easily replicable by other companies with enough capital.
    • The technology involved in mining bitcoin is not unique and cannot guarantee a sustainable advantage, because it evolves constantly, it is often accessible to competitors, and it changes every time a new better mining machine comes out.
  • No Pricing Power:
    • They are a price-taker, meaning they have to sell Bitcoin at the prevailing market prices, and have no pricing power in that regard.
    • In the hosting business, customers will go with whichever provides the most competitive offering, which would be determined by market forces.
  • Lack of Brand:
    • While the brand might be known in the crypto circles, in general brand doesn’t act as a source of competitive advantage in this area.
  • Intangibles:
    • They do not have significant intellectual properties to set themselves apart, and also, mining machines are not unique or unreplicable assets.
  • Switching Costs:
    • There are no meaningful switching costs for either mining or hosting customers because there are plenty of options available for these services.

Risks to the Moat and Business Resilience

Several legitimate risks could impact Core Scientific’s moat and business resilience:

  • Bitcoin Price Volatility:
    • The biggest risk stems from the extreme volatility of Bitcoin’s price, as their revenue is directly proportional to the price of the cryptocurrency. A sharp drop can quickly turn profits into losses, as it has in the recent past, and can quickly make their operations unprofitable.
  • Increasing Competition:
    • The crypto mining industry is extremely competitive, with new players and companies constantly entering the market, which could erode Core Scientific’s market share. The technology involved is constantly evolving as well.
  • Regulatory Changes:
    • Changes in laws and regulations regarding cryptocurrency mining could negatively affect the industry and thus Core Scientific. There is uncertainty around which way the regulations will go.
  • Technological Disruption:
    • The mining equipment becomes obsolete as new faster machines come out regularly. If they fail to keep up with new technology, their operations might fall behind the competition.
  • Energy Costs:
    • The cost of electricity, which is a critical input for their mining operations is prone to price volatility and might negatively affect profitability if not hedged or negotiated properly. They also require a stable supply, and any disruption can affect their operations.
    • The increasing push for using renewable power may put the company at a disadvantage if they cannot switch to a renewable energy source without raising operational costs, for instance.
  • Reorganization Risks:
    • The company emerged from bankruptcy, and there are risks that it could fail to follow through with the restructuring, as a part of which, they took on new debt. There are concerns surrounding their ability to stay solvent and profitable.

Overall, Core Scientific’s lack of a sustainable moat, its volatile financial results, and its poor balance sheet, make the company an extremely risky prospect. Furthermore, they are heavily reliant on forces beyond the companies control, such as the price of bitcoin, and may find their competitive standing eroded by new players, new technologies, or changes in regulations.