TeraWulf Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

TeraWulf, a digital asset technology company, focuses on bitcoin mining using sustainable energy sources in the United States, operating facilities that integrate Bitcoin mining with infrastructure, sustainable energy and high-performance computing 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.

Moat Assessment: 2/5

TeraWulf’s business model is centered around Bitcoin mining using low-cost energy which they achieve by operating near power generation facilities and negotiating cheap, long term power agreements. This is the base for them achieving lower cost of production compared to their peers, giving them a marginal cost advantage. However, this isn’t exactly a moat because other companies can employ the same strategy and establish their own facilities near a cheaper source of power, and the cost of building the facilities, or co-locating them, is not very high either. Therefore, we rate this as a weak cost advantage.

Additionally, the company is focusing on using nuclear power, this can also add to the moat, provided they are able to generate and deliver power sustainably and profitably as many companies are focused on alternative energy resources such as solar and wind power.

Furthermore, while the cost of inputs is a major factor in this industry, they don’t form sustainable barriers against competition that can be long-lasting. Therefore we give WULF an economic moat of 2 on 5, representing weak defensibility against its competitors, since they can easily copy its business model and make it more efficient.

Legitimate Risks that could Harm the Moat and Business Resilience

  • Bitcoin Price Volatility: The most prominent risk is the inherent volatility of Bitcoin prices. As a Bitcoin mining company, WULF’s profitability is directly linked to the price of Bitcoin. A drastic and sustained drop in Bitcoin prices would severely impact their revenues, margins, and even solvency.

  • Energy Costs: Although WULF focuses on low-cost energy solutions, changes in energy prices or availability can disrupt operations. Increases in cost or disruption in access to energy can quickly erode profitability and any potential competitive advantage based on cost savings, and may even create a cost disadvantage for them.

  • Technological Obsolescence: Advances in mining technology and the development of more efficient mining hardware could impact their competitiveness. Should their machinery become significantly less productive than the latest generation of mining equipment, their profitability will suffer, and they would have to spend significant capital to upgrade or replace their machinery.

  • Regulatory Environment: Changes in cryptocurrency regulations could affect WULF’s operations. Government restrictions on crypto-mining, or the use of cryptocurrency itself can be impactful. Changes in crypto tax policy is also an area to watch out for.

  • Competition: The Bitcoin mining industry is capital intensive and highly competitive. A surge in new entrants can erode profits for the existing players. Companies that manage to generate enough scale and employ the lowest cost process, might be able to squeeze margins of their smaller competitors. Also, the expansion of existing players can also lead to capacity issues, which might result in pricing and profitability issues for many players.

  • Operational Risks: Operating the facility at full capacity is necessary to reduce unit costs of operations, even a minor operational disruption could greatly affect overall profits. Problems like equipment malfunctions, infrastructure failures, and cybersecurity risks, have a potential to harm profitability, business continuity, and reputation.

  • Debt: The company has a significant amount of debt, which must be repaid through high returns in operations. This could put severe pressure on the cash flows, if for some reason profitability decreases, they would have to pay huge amounts of interest and principle which might not leave any cash for business development and expansion.

  • Dilution: In order to grow and survive in the industry, they require to take on lots of capital. As such, the company is constantly issuing shares to raise funds, which dilutes ownership among existing shareholders.

  • Business Resilience: Although the company focuses on low cost energy sources, they are still not in control of energy prices. It can take some years for a company to get access to such energy sources (both geographically and by making deals), therefore it can be difficult for the company to make adjustments, should the energy prices increase.

In summary, the business does generate a tiny cost advantage through cheap and long term energy agreements and is making efforts towards expanding and securing their energy supply. However, it has to work on other aspects such as improving processes and operations, having a good management team to better position the business.

Business Description and Competitive Landscape

TeraWulf is a Bitcoin mining company that operates digital asset mining facilities in the United States using a primarily low-cost nuclear energy to power its operations. They’re a vertically integrated company that owns its infrastructure and mining power.

  • Revenue Distribution:
    • The company generates revenue primarily from the sale of mined Bitcoin. They are a Bitcoin miner and don’t have operations like transaction processing or crypto custody etc.
  • Trends in the Industry:
  • The industry is going through a phase of consolidation, with large players gaining ground over the smaller companies. * The industry is also becoming more competitive with lots of new entrants focusing on new and more efficient ways to mine Bitcoin.
    • The Bitcoin mining industry relies heavily on access to cheap and stable energy. Companies are constantly pursuing strategies to make energy costs lower and more predictable, with many opting for renewable sources of energy to generate power.
  • Margins:
    • The mining industry has a very high barrier to entry when it comes to the required capital expenditure for the equipment and setting up the facilities. Those firms which can manage to lower energy expenses through long term agreements and partnerships with other energy firms, can lower their operational costs significantly. Thus, such firms are capable of expanding and grabbing higher market share.
    • As such, profitability is largely impacted by cost control and the price of Bitcoin. Low cost energy, higher prices of bitcoin, high rate of bitcoin production, lower loan interest, etc are all factors that increase profit margins for the company.
    • But, at the same time they can also experience operational problems such as equipment damage, electricity shutoff, cyber security threats that might lead to lower production and higher expenses, thus impacting margins badly.
  • Competitive Landscape:

    • The Bitcoin mining industry is extremely competitive. Several companies are trying to expand their operations to establish large facilities to gain economics of scale. Also, many firms are developing newer and more efficient mining techniques that increase production and reduce expenses, that are difficult for existing companies to quickly implement.

    • Other competitors range from Marathon, Riot, CleanSpark, Hut 8, Core Scientific etc. Some of these companies are well established and are larger than WULF.

  • What makes WULF different:
    • The company operates using primarily nuclear power, which is one of the cheapest methods for generating electricity that can be used in a large scale and with less dependence on fossil fuels. The company is also focused on having a strong and consistent energy pipeline through its power agreements.
    • They focus on building new facilities or co-locating them near their energy sources. They also aim at producing large amounts of bitcoin in an energy efficient way, which would enable them to operate at lower costs than their peers.

Financial Analysis

  • Revenue:
  • In the last financial year ending December 31st, 2022, WULF generated $68.7 million in revenues. In the last 9 months ending September 30, 2023, they generated revenues of around $80 million and in the three months ending September 30th, 2023, they generated revenues of $26 million. The revenues for the 3 months ending March 31st, 2023 were around $30.9 million.

  • The company’s revenues and profitability is highly dependent on the price of bitcoin, if bitcoin prices rise, the revenues and margins would also rise.

  • Gross Profit:

  • The gross profits for the company have followed a similar trajectory to revenues and it has also had fluctuations along with them. The gross profit for the financial year of 2022 was roughly $14.1 million and in the 9 months ended September 30th 2023, they generated a gross profit of around $24.6 million. In the last quarter ended 2023, their gross profits are very low and in fact a loss, as their operational costs were higher than their revenues. The company has a very low profit margin in their operations of bitcoin mining.

  • Net Profit:
    • The company has had negative net profit for the past few years, having lost $79.8 million in the year ended 2021, and $155.6 million in the year ended 2022. In the nine months ending September 30th 2023, the net loss comes at around $167 million. This shows that the company’s operating expenses are way higher than their revenues, also indicating the problems with profitability. The company’s financials also get significantly affected by fluctuations in bitcoin prices which results in volatile earnings.
  • Balance Sheet:

    • The company has a good asset position, with property plant and equipment worth $834 million at September 30th, 2023, which is 88% of total assets of $948.8 million. They also had intangible assets of $104.6 million. Their current assets were relatively low compared to total assets, with around $114 million. However, current liabilities are more than current assets, resulting in negative working capital, therefore a slight risk for short-term liquidity.

    • On the other hand, their debt is way too high, with total debt of around $685 million including the capital lease obligations of about $123 million. That creates a huge liability for the company. They also have common equity of $155 million. The company’s debt equity ratios are way beyond than the safety limits, which is a major risk for the business, since they have to generate enough cash flows in the future to service these debts and avoid financial stress.

  • Cash Flows:
  • In the operating cash flows, there is a constant and high cash outflow and very low inflow in the last 3 years. It had net cash outflows from operations in 2021, 2022 and 9 months of 2023, respectively, which indicates they are not generating enough cash from operations to sustain the business and it requires other sources of financing.
*  Investing activities had net cash outflows because they are constantly expanding their facilities and getting hold of new ones.

*  Financing is another critical aspect where the company has been taking on massive debts and issuing new equity to support the business.

  • Recent Concerns and Problems: * The company’s Q3 results missed analyst estimates for revenues, which resulted in the stock taking a plunge after the report. * Management has repeatedly mentioned during the earnings calls their focus on securing low-cost energy prices and expanding their operations, in line with their growth strategy. However, despite positive comments on the production of the business and their growth trajectory, some investors remain skeptical about the ability of the company to maintain a positive cash flow in such a volatile industry with heavy debt.

    • There was an incident when the company did not repay the $13.9 million debt on time and the creditors were willing to take some of their assets to recover their debt. However, the management says that it did not have any negative impact. It was an oversight, and the company is focusing on restructuring debt to prevent such things from happening in the future.
*   Management also had some concerns over the impact of bitcoin price volatility and their ability to predict the market. They have put the utmost importance on long-term planning with consistent operations and efficiency improvements to mitigate these risks.

Understandability: 4/5

TeraWulf’s business model is somewhat straightforward. It essentially boils down to mining bitcoin while leveraging cheap power, and selling these mined bitcoins to investors for cash. The company has a vertical integration process by owning its mining facilities and acquiring energy directly, instead of sourcing from a third party. While the business is rather simple in concept, the financial implications, the dynamics of the crypto markets, and the impact of external factors like government regulations makes it a bit complex to analyze the business. Due to this reason, we give it a rating of 4.

Balance Sheet Health: 2/5

The company’s balance sheet is struggling due to high debts and losses. The company has high long-term debt combined with negative working capital and low current assets. Their profitability is very low, with constant losses and high expenses. WULF has a very low cash reserve and is highly dependent on external sources of funding to run the business and continue its operations. Because of these reasons, we consider its balance sheet to be very unhealthy, giving it a rating of 2.