Iris Energy Limited

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 3/5

IREN is a technology company focused on sustainable Bitcoin mining, primarily using its own facilities, and generating revenues from mining activities, including hosting services and related activities.

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.

IREN’s moat is very weak and has a 1/5 rating because there are few competitive advantages that it has and those advantages are not defensible and hard to sustain. The company operates in a very commoditized industry, Bitcoin mining, where any company that has capital can compete. Bitcoin itself, as a currency or an asset, does not give any competitive advantage to the company.

IREN’s primary focus is on access to low-cost, renewable energy sources. While this could be a potential advantage, it depends heavily on geography and other factors that are outside of the company’s control. Furthermore, there is no evidence they are able to obtain power at better costs than others. Another strategy that IREN is following is technological innovation in mining operations, but the improvements that are created are unlikely to translate into durable competitive advantages. Any improvement is quickly replicated by competitors. Therefore, IREN has a poor moat. The company has few unique assets, no economies of scale or scope, and very low switching costs. Customers could easily choose other miners or mine themselves. In conclusion, this is a highly competitive industry and a very weak moat.

Risks to the Moat and Business Resilience:

Several risks could negatively impact IREN’s business and moat:

  • Bitcoin Price Volatility: Bitcoin prices are notoriously volatile. Dramatic declines in Bitcoin prices would directly impact IREN’s revenues and profitability, making it difficult to maintain operations. Any major crash could create big losses.
  • Electricity Costs: IREN’s profitability is significantly influenced by electricity costs. Increases in these costs could severely cut profitability and potentially force IREN to operate at a loss. Power costs tend to be correlated to the underlying macro-economic environment, with energy prices increasing along with inflation. Therefore, this is a significant risk for IREN.
  • Regulatory Uncertainty: Regulatory oversight in the cryptocurrency space is rapidly evolving. Changes in rules or restrictions on bitcoin mining could limit or even outlaw IREN’s operations in specific jurisdictions. Political instability and changing governmental priorities could also impact the company’s operations. The more governments try to regulate Bitcoin, it may be harder for IREN to maintain a profitable business.
  • Competition: The Bitcoin mining industry is intensely competitive. New entrants and expansions by existing players are very likely to cause overcapacity, which would lower IREN’s revenues. There is no protection of IREN’s returns.
  • Technological obsolescence: Bitcoin mining technology rapidly changes. Newer and more efficient mining equipment or techniques can quickly make IREN’s older equipment obsolete and inefficient and reduce its profitability. The lack of innovation or an inability to integrate the improvements could seriously damage IREN.

While IREN’s business faces considerable risks, it also has some factors that can increase the resilience of its business:

  • Long-term power contracts: Securing long-term contracts for low-cost, renewable energy may reduce future exposure to price increases and provide predictable cash flows, also if those contracts are on a fixed price model, the impact of volatility is greatly reduced.
  • Diversified Operations: A geographical diversification of operations can help IREN reduce risk to localized political instability and potential legal complications.
  • Potential for Innovation and R&D: Innovation in Bitcoin mining and technology may increase profitability and help improve the sustainability of the business.

Business Overview:

  • Revenue Distribution:
    • IREN generates revenue by mining Bitcoin and other cryptocurrency digital assets.
    • The company offers hosting services to third parties, in which customers run their mining equipment at IREN’s facilities.
    • The company can provide other related services, such as data storage, maintenance, and analytics. These revenues are all tied to the production of Bitcoin in a way.
  • Industry Trends:
    • The Bitcoin mining industry is a complex, emerging and highly competitive industry.
    • The price of Bitcoin itself fluctuates a lot and will highly impact the company’s results.
    • Bitcoin mining is becoming more and more competitive, increasing pressure on all miners to improve efficiency.
    • There are continuing discussions about the environmental impact of Bitcoin mining which are resulting in increased regulations and legal hurdles for the industry.
    • The industry has recently experienced several periods of high volatility due to macro economic events, which have had a dramatic effect on smaller and bigger miners.

  • Bitcoin and other digital assets are increasingly seen as long-term investments by both institutional and private investors, which may contribute to less volatility.

  • Margins:
    • IREN’s margins are highly dependent on the price of Bitcoin. Lower Bitcoin prices will have a direct negative effect on revenue.
    • Electricity costs are the biggest variable cost component in mining, and margins are strongly sensitive to any changes in electricity price.
    • The need for constant updates to mining hardware is going to increase capital expenditures, pressuring free cash flows, and profitability.
  • Competitive Landscape:
    • IREN faces competition from other established publicly traded miners such as Marathon Digital Holdings, Riot Blockchain, Core Scientific, and many others.
    • Competition is intense both in the price of assets and in obtaining low cost electricity. The increase in the hash rate means that the network becomes more competitive, increasing difficulty.
    • In addition, smaller operations (private miners) and industrial companies also mine Bitcoin.
  • What Makes IREN Different:
    • IREN’s claim to fame is their focus on sustainable mining. As a result, they are located close to wind, hydro and solar power plants.
    • While a focus on sustainability may gain some support from the market, it does not create any clear competitive advantage.
    • Their primary operations are geographically diverse, which helps to reduce the exposure of political and business risks. But such diversification can also increase logistical and logistical costs.

Financial Overview:

  • Revenue: The company’s revenue is directly tied to Bitcoin production. The revenue generated from Bitcoin mining varies depending on the average block rewards, fees associated to each transaction, and the price of Bitcoin. Therefore, there can be great fluctuations in revenue.
  • Expenses: Cost of revenues is heavily based on electricity costs. The prices paid for electricity varies between different geographies. The biggest part of other operating expenses is comprised of costs for site operations and personnel costs. These costs are usually semi-fixed. Expenses also include research, development, and impairment costs.

  • Profitability: Due to fluctuating market prices of Bitcoin and the fixed costs, the company is very exposed to losses. In the last fiscal year, the company reported a huge net loss, mainly caused by low Bitcoin prices. The gross and operating margins may vary significantly from quarter to quarter.

  • Key Ratios:
    • The company’s book value was around USD $3.05 per share on the most recent filings, which is above the current stock price.
    • The company had negative earnings per share of - $3.31 for FY2023, and - $4.57 for FY2022.
    • The company has a current ratio of 2.5, indicating short term liabilities have been adequately covered by current assets.
    • The debt-to-equity ratio is around 0.65, showing that the business is financed mainly through equity, not debt.

Recent Concerns and Management Commentary:

  • IREN has recently undergone a severe price decline, dropping from a high of about $30 to the current price of around $2.
  • Management has mentioned the volatility and uncertainty associated with the Bitcoin price as a primary factor for the large fluctuations in company’s valuations.
  • They are focusing on expanding operations in the most cost effective areas to lower the average energy costs.
  • The new mining sites (particularly those powered by hydro) are expected to lower costs and create higher profit margins.
  • They are working toward reducing the debt and interest payments, in order to better position the company.
  • The management is aware of the importance of stable revenue and therefore they have created opportunities to leverage their infrastructure, through hosting and other related services.

Understandability:

IREN’s understandability is rated as 2/5. While its basic business model of Bitcoin mining is simple, the numerous details regarding energy contracts, financial instruments, global regulations, and technical details around blockchain technology greatly increase the complexity, making the business difficult to fully understand for retail investors.

Balance Sheet Health:

IREN receives a 3/5 on its Balance Sheet health rating.

  • Current ratio of 2.5 demonstrates sufficient liquid assets to cover short-term liabilities.
  • Debt-to-equity ratio of 0.65 shows the company is mainly financed with equity.
  • The company recently went through a huge net loss, reducing the shareholder equity and value.
  • IREN has been actively diluting shares over the past year.