The market is currently very bullish on cryptocurrencies. Retail and institutional investors have been adding cryptocurrencies to their portfolios to hedge against inflation and use as a store of value. Bitcoin, the most popular cryptocurrency, received a solid boost this year from large strategic investments by major corporations. The cryptocurrency boom has given rise to major start-ups in China, some of which have gone public and are surging in price on nothing more than investor optimism.
However, President Biden has inherited a tense relationship with China from his predecessor, and the U.S. Congress has already passed a law that could potentially kick Chinese companies off U.S. exchanges as 2022 sets in if they do not comply with U.S. auditing requirements.
Cryptocurrencies remain rather volatile and risky investment vehicles. Although a short-lived correction in Bitcoin recently stymied what has otherwise been a remarkable run for crypto stocks, not all players are well positioned for a recovery. In the absence of requisite financial strength, we think it wise for investors to avoid China-based cryptocurrency players Canaan, Inc. (CAN) and Ebang International Holdings Inc. (EBON) for now due to their poor future prospects.
Canaan, Inc. (CAN)
CAN is a leading provider of supercomputing solutions and integrated circuit (IC) final system products. It is renowned for having invented the world’s first ASIC-powered bitcoin mining machine in 2013 and radically catalyzing the growth of a computationally advanced bitcoin mining sector. The China-based company continues to be the second largest designer and manufacturer of bitcoin mining machines globally and continues to expand its suite of advanced hardware offerings, exploring opportunities across emerging technologies.
In the fourth quarter of 2020, CAN launched a second-generation AI chip Kanzhi K510 after two years of development. The chip is positioned in the mid- to high-end market and is an edge-side AI chip fully oriented to application scenarios. Compared with the first-generation of AI-chips, the computing power of this chip has increased three times.
In the third quarter, ended September 30, 2020, CAN delivered $24 million in total revenues, declining 75.7% year-over-year and 8.5% sequentially. The decrease was driven primarily by decreases in total computing power sold and average selling price per Thash/s during the quarter. CAN reported a loss of $0.54 per share, more than quadruple the quarter-ago loss of $0.10 per share.
CAN has gained a whopping 337.1% over the past year to close yesterday’s trading session at $22.25. The stock retreated nearly 39% last week, in line with the Bitcoin correction, but is still 275.2% up year-to-date. In terms of trailing-12-month sales, CAN is currently trading at 26.81x, 505.6% higher than the industry average 4.43x.
In February, CAN issued a statement announcing that its revenue visibility has improved substantially in 2021 as a result of attaining purchase orders totaling more than 100,000 units of bitcoin mining machines from customers in North America. CAN has strengthened its research and development capabilities, expanded its AI business, and executed new business initiatives over the past year. However, the company is far from profitability and its inflated prices are not justifiable.
CAN’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which equates to Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
CAN has an F grade for Growth and Stability, and a D grade for Value and Quality. The stock is currently ranked #50 in the 50-stock Technology – Hardware Industry.
In total, we rate CAN on eight different levels. Beyond what we’ve stated above, we have also given CAN grades for Momentum and Sentiment. Get all of CAN’s ratings here.
Ebang International Holdings Inc. (EBON)
EBON is a blockchain technology company that manufactures and sells Bitcoin mining machines and telecommunication products in the People’s Republic of China, the United States, Hong Kong, and internationally. With strong application-specific integrated circuit (ASIC) chip design capability, EBON is a leading mining machine producer in the global market, with steady access to wafer foundry capacity.
Last month, EBON launched its Bitcoin mining business. EBON plans to operate its Bitcoin mining business by adopting a combination of deploying self-manufactured mining machines and mining machines purchased from other manufacturers as well as leasing computing powers from other mining farms. At the same time, EBON expects to invest in data center constructions to provide support for Bitcoin mining activities.
In the first six months of 2020, EBON sold 0.25 million Thash/s of total computing power, representing a year-over-year decrease of 86% from the comparable period in the prior year. Its total net revenues during the period were $11.04 million, falling 50.6% year-over-year. However, its operating losses narrowed to $8.68 million from a year-ago loss of $27.47 million. In addition, the company reported a loss of $0.06 per share, compared to a year-ago loss of $0.16 per share.
EBON has gained nearly 60% over the past year to close yesterday’s trading session at $7.98. The stock lost nearly 38% last week but is still 38.6% up so far this year. EBON is setting itself up for multiple revenue streams but has not yet been able to generate profits. Hence, the stock is also perceived are severely overvalued by traditional measures. In terms of trailing-twelve-month ev/sales, EBON is currently trading at 17.18x, 259% higher than the industry average 4.78x.
EBON’s move into the mining business should contribute to its top-line and optimize its product offering structure. It will help the company’s transformation from a hardware manufacturer to a blockchain company with comprehensive involvement in its industry chain. However, EBON has not yet been able to tackle its supply chains issues, which are overloaded by unprecedented demand for Bitcoin mining products.
It’s no surprise that EBON has an overall rating of D, which translates to Sell in our POWR Ratings system. EBON has a D grade for both Stability and Quality. It is ranked #36 of 43 stocks in the Technology – Electronics industry.
In addition to the POWR Ratings grades I’ve just highlighted, you can see the EBON’s ratings for Growth, Value, Momentum, and Sentiment here.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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CAN shares were trading at $20.71 per share on Tuesday afternoon, down $1.54 (-6.92%). Year-to-date, CAN has gained 249.24%, versus a 3.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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