During the  onset of the COVID-19 pandemic last March, the most popular cryptocurrency, Bitcoin, traded below $4,000. In addition to the public health crisis, the struggling global economy, a dovish monetary policy stance and weak U.S. dollar enhanced the appeal of cryptocurrencies to both retail and institutional investors. Consequently, since its lows last March, Bitcoin has rallied sharply, recently crossing the $58,000 mark. Investors are now considering factoring cryptocurrencies  into their asset allocations to hedge against inflation and to store value.

Bitcoin’s wider acceptance as  a bona fide currency has been given a boost by  large strategic investments in it by companies like Tesla (TSLA). This has sparked increased interest from players in different industries in expanding into Bitcoin mining operations.

CleanSpark, Inc. (CLSK), an energy software and control technology company is an example. The company  recently entered the Bitcoin business with the acquisition of ATL Data Centers, a Mining as a Service (MaaS) company.

Let’s take a closer look at the factors that could influence CLSK’s performance in the near term:

Bitcoin Mining Capacity

CLSK  recently issued a 60-day post-acquisition update on its Bitcoin mining operations. ATL Data centers  owned and operated a fleet of Bitcoin miners producing over 200 PH/s in mining capacity at the time of acquisition. But the company noted  that it has continued to procure and deploy mining equipment as part of its strategic growth initiative. It expects to have more than 315 PH/s of Bitcoin mining capacity deployed by the end of this month, representing a greater than 65% increase in capacity.

Potential Securities Fraud

CLSK has been targeted by short sellers in recent weeks, with Culper Research accusing  the company of fraudulent reports. According to the lawsuit’s allegations,  CLSK has “fabricated key elements of its business, including purported customers and contract figures.” The company is also “rife with undisclosed related party transactions” with respect to its February 2020 acquisition of p2k Labs, Inc. Further, Culper Research report alleges that CLSK “appears to have purchased the side business of its CFO, with zero relevance to the company’s supposed clean energy mission.” The Culper Research report shocked the market and shares of CLSK fell by approximately 9.2% on the report’s publication date  last month.

Quarterly Update

In its fiscal first quarter ended December 31, 2020, CLSK reported $2.25 million in revenues, surging 130% year-over-year. Strong service, software, and digital currency mining revenue drove the growth. While the energy business contributed 54% to its  top line, the Bitcoin mining segment generated $0.73 million, 32% of its  total revenue. However, its loss  from operations doubled to $6.2 million. CLSK reported a loss of $0.32 per share. As a result, its  negative operating cash flow also rose to $6.8 million.

Stretched Valuation

CLSK witnessed a massive run up over the past year. The stock has returned a whopping 1,035% over this period. As a result, the stock is being perceived severely overvalued by traditional measures. In terms of forward p/e, CLSK is currently trading at 279.31x, 751.7% higher than the industry average  32.80x. In terms of trailing-12-month p/s also, CLSK’s 44.60x is significantly higher than the industry average  4.50x.

POWR Ratings Indicate Bleak Prospects 

CLSK has an overall rating of F, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, CLSK has a Value Grade of F, consistent with its higher-than-industry valuation multiples.

CLSK has a grade of F for Stability as well, indicating that the stock is highly volatile compared to its peers. Of the 107 stocks in the D-rated Software – Application industry, CLSK is ranked #101.             

Beyond what I stated above, we also have given CLSK grades for Growth, Momentum, Sentiment, and Quality. Get all the CLSK ratings here.

Bottom Line

CLSK has continued to procure and deploy mining equipment as part of its strategic growth initiative. However, it remains primarily an energy company that provides technology solutions for microgrids. The company sticks to its long-term plans for renewable energy implementation and deployment of its technologies to further decrease power costs. The company has ventured into the Bitcoin mining industry and EV charging station market despite being profitable in its core business and with no pre-ordered mining equipment.

So,  in addition to the class action lawsuit, CLSK faces immense competition from other ‘pure play’ publicly traded cryptocurrency mining companies that have already deployed mining capacity. So, we think it’s wise for investors to wait until CLSK’s  near-term prospects  improve before investing.

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CLSK shares were trading at $31.60 per share on Monday afternoon, down $4.71 (-12.97%). Year-to-date, CLSK has gained 8.78%, versus a 3.95% 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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