There is no investment hotter than Bitcoin right now as investors are buying cryptocurrencies to hedge against inflation and use them as a store of value, over precious metals. While the most popular cryptocurrency Bitcoin traded below $4,000 at the onset of the COVID-19 in March last year, the digital currency had hit an all-time high of $58,330.57 over the weekend to reach a $1 trillion market cap. However, the cryptocurrency tumbled as the working week began.
The sharp withdrawal of Bitcoin can be attributable to a tweet by the world’s richest man, Tesla (TSLA) CEO Elon Musk, that the prices of Bitcoin “do seem high.” Consequently, Bitcoin dropped more than 16%, its largest daily drop in a month.
In recent weeks, Bitcoin received a boost by large strategic investments in it by companies like TSLA, Mastercard (MA), Bank of New York Mellon, and MicroStrategy (MSTR). Given the rapid pace of digitization, investors were enamored by the growth prospects and potential of the crypto space. This has sparked increased interest from players in different industries in expanding into Bitcoin mining operations.
Treasury Secretary Janet Yellen issued a warning on Monday that bitcoin is an “extremely inefficient” way to conduct monetary transactions and the dangers that it poses both to investors and the public. Following this warning, the expected excessive regulation on cryptocurrencies might have added to the selling pressure.
Cryptocurrency players like Ebang International Holdings Inc. (EBON), CleanSpark, Inc. (CLSK), and The9 Limited (NCTY) have run too far too fast, and it appears from their current valuation multiples that a pullback is due for them. And Bitcoin’s correction could lead to a sell-off for these stocks. So, it’s better to avoid them for now.
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.
On February 17, 2021, EBON launched its Bitcoin mining business. According to the company’s resolution, 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, the company also expects to invest in data center constructions to provide support for Bitcoin mining activities. Additionally, EBON expects to commence public testing of its cryptocurrency exchange and officially launch the exchange in the first quarter of 2021. Currently, the company has completed the internal testing of its cryptocurrency exchange.
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. Total net revenues during the period were US$11.04 million, falling 50.6% year-over-year. However, operating losses narrowed to $8.68 million from the year-ago loss of $27.47 million. Additionally, the company reported a loss of $0.06 per share, compared to the year-ago loss of $0.16 per share.
EBON is setting itself up for multiple revenue streams. However, the company is not making profits yet and its current valuations are not justified. In terms of trailing-twelve-month EV/Sales, EBON is currently trading at 17.18x, 259% higher than the industry average of 4.78x. In terms of the trailing-twelve-month P/S ratio as well, EBON is trading significantly higher than the industry average (12.65x vs 4.50x).
EBON’s move to enter into the mining business will 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 involvements in its industry chain. However, Bitcoin mining is profitable as long as Bitcoin prices show strength. A high price movement will drive demand for EBON’s mining products. Hence, in line with the Bitcoin correction, the stock lost nearly 24% yesterday intraday to close the session at $8.41 with a year-to-date gain of 38.6%.
EBON’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
EBON has a grade of D for both Stability and Quality. It is ranked #36 of 43 stocks in the Technology – Electronics industry.
In total, we rate EBON on eight different levels. 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.
CleanSpark, Inc. (CLSK)
CLSK provides energy software and control technology solutions worldwide. It offers distributed energy systems and microgrids that allow customers to manage renewable energy generation, storage, and consumption. CLSK entered into the Bitcoin business with the acquisition of ATL Data Centers, a Mining as a Service (MaaS) company in December 2020.
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” concerning its February 2020 acquisition of p2k Labs, Inc. The Culper Research report shocked the market and shares of CLSK fell by approximately 9.2% on the report’s publication date last month.
CLSK has recently issued a 60-day post-acquisition update on its Bitcoin mining operations. The company pointed out 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.
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, and the Bitcoin mining segment generated $0.73 million, 32% of the total revenue. However, loss from operations doubled and CLSK reported a loss of $0.32 per share.
CLSK witnessed a massive run-up over the past year. The stock has returned a whopping 837% over this period. As a result, the stock is being perceived as 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 of 32.80x. In terms of trailing-twelve-month P/S also, CLSK’s 44.60x is significantly higher than the industry average of 4.50x. However, the stock 17.4% yesterday intraday to close the trading session at $29.98.
CLSK’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F which translates to a Strong Sell in our POWR Ratings system. CLSK has a grade of F for both Value and Stability. In the D-rated, 108-stock Software – Application industry, it is ranked #103.
Beyond what we stated above, we also have given CLSK grades for Growth, Momentum, Sentiment, and Quality. Get all the CLSK ratings here.
The9 Limited (NCTY)
NCTY is an internet company that operates and develops online games in the People’s Republic of China. The company offers online games, including CrossFire New Mobile Game and Audition, and also provides technical consulting services. NCTY has recently stepped into blockchain-related business and aims to become a diversified high-tech internet company.
NCTY expanded its focus into the cryptocurrency realm in January this year by signing a cooperation and investment term sheet with several prominent investors in the crypto space to start this business. This group of investors includes Jianping Kong, the former co-chairman and director of Canaan (CAN), a mining machine manufacturer. Qifeng Sun, another former CAN director, is also part of this new investment deal for NCTY. This was soon followed by signing legally binding MOUs with five Bitcoin mining machine owners to purchase Bitcoin mining machines by the issuance of Class A ordinary shares. After the completion of the transaction, NCTY is expected to own 26,007 Bitcoin mining machines, with a total hash rate of approximately 549PH/S.
Earlier this month, NCTY signed another MOU with six unrelated Bitcoin mining machine owners to purchase Bitcoin mining machines by the issuance of its ordinary shares. This batch of mining machines includes different brands with a total number of 10,489 units and a total hash rate of approximately 251PH/S. Additionally, on February 16, NCTY signed a $10 million framework agreement mining equipment for Filecoin mining. Furthermore, the company acquired 70% equity in Hangzhou SuanLi Technology, a cryptocurrency cloud mining blockchain software-as-a-service company, yesterday in a $7 million deal.
In line with this series of developments, the stock is up a whopping 2,204.2% so far this year and we believe this run has been overdone. In terms of trailing-twelve-month EV/Sales, NCTY is currently trading at 9,502.27x, 327,624.5% higher than the industry average of 2.90x. In terms of the trailing-twelve-month P/S ratio as well, NCTY is trading significantly higher than the industry average (4,291.58x vs 1.82x).
The recent news does reflect NCTY’s potential to emerge as a solid player in the crypto space. However, the company has been venturing into other industries to stay afloat. NCTY entered into the electric vehicle manufacturing market in 2019 and now into Bitcoins when its core video gaming segment has been struggling for a while. The recent run has helped the company fare as it was facing the possibility of being delisted last year for not meeting the continued listing requirement of minimum Market Value of Listed Securities. However, with such valuations, it’s wise for investors to be skeptical.
It’s no surprise that NCTY has an overall rating of D which equates to Sell in our POWR Ratings system. NCTY also has a grade of D for Value and a C for Stability. In the D-rated, 86-stock China industry, it is ranked #68.
Click here to see the additional POWR Ratings for NCTY (Growth, Momentum, Sentiment, and Quality).
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EBON shares were trading at $7.25 per share on Tuesday morning, down $1.16 (-13.79%). Year-to-date, EBON has gained 19.44%, versus a 3.02% 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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