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Iris Energy Stock Analysis: Future Growth Forecast for NASDAQ:IREN

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In my analysis of Iris Energy Limited (NASDAQ:IREN), I do not see it as a long-term hold despite the consensus among analysts recommending it as a strong buy with an average price target of $19.08. Fundamental analysis suggests that these estimates may be overvalued, with my base case presenting a fair value of $8.26 per share. I challenge the value proposition that IREN presents to investors compared to its larger competitors like CleanSpark (CLSK), Riot Platforms (RIOT), and Marathon Digital Holdings (MARA).

IREN’s strategy differs from its competitors as it sells all the bitcoin it mines and reinvests the proceeds in expanding its hashrate capacity and data center infrastructure. While the market values 1 EH/s of hashrate capacity at nearly $135 million for large-scale miners, IREN delivers 1 EH/s at approximately $30 million, leading to the decision to reinvest and expand the hashrate for shareholder benefit. However, a discounted cash flow (DCF) analysis complicates the picture, questioning whether IREN’s fundamentals justify the consensus targets.

Despite these challenges, there is a case for holding IREN into the bitcoin halving cycle of mid-year 2025, as bitcoin miner stocks are more speculative and trade based on sentiment. Significant increases in Bitcoin’s price can rally IREN’s stock, while decreases can have the opposite effect. Therefore, IREN may be used as an expression of confidence in Bitcoin’s performance in the 2024-2025 halving cycle.

The key driver of IREN’s cash flows going forward is the price of Bitcoin, with revenue being a direct function of the Bitcoins mined multiplied by the Bitcoin price. The uncorrelated movement in cash flows across different years is due to changes in capex spend as IREN expands its operations. My base case assumptions for Bitcoin price are based on the Bitcoin Power Law, which shows an exponential relationship to time with upward movements every halving cycle.

The future expansion of IREN’s EH/s capacity is crucial for its cash flows, as block difficulty in Bitcoin mining necessitates continuous expansion to stay competitive. IREN’s aggressive expansion plans, as outlined in investor slides, are sensitive to changes in the pace of expansion, with any decrease potentially signaling a red flag. The associated capex for EH/s expansion is projected based on IREN’s guidance and assumptions about sourcing ASICs at current prices.

Electricity costs also play a significant role in IREN’s cash flows, with a weighted average of $0.037/kwh assumed throughout the projection period. Power efficiency metrics are crucial, with fluctuations expected as IREN upgrades its mining equipment. The assumptions about electricity costs and power efficiency directly impact the implied share price in the analysis.

The terminal value assumptions for IREN are based on Bitcoin’s projected future price, which influences the growth rate for the perpetuity method. The perpetuity growth rate is derived from historical Bitcoin price trends and averages to provide insight into the company’s long-term valuation.

IREN’s foray into the AI Cloud business introduces another revenue stream, with assumptions about GPU capex and operational metrics factored into the analysis. The AI business may provide steadier revenue during low years in the Bitcoin cycle and enhance the company’s ability to secure debt financing. However, the ROI from the AI business is lower compared to mining operations, and investors should adjust their expectations accordingly.

Comparing IREN to other miners in the industry reveals insights into its operational efficiency and potential challenges. Monthly mining metrics and quarterly reports provide valuable data on IREN’s performance and gross margins, with a focus on electricity costs and profitability.

In conclusion, while IREN may not be a buy for the long term, holding it into the bitcoin halving cycle of mid-year 2025 could be a strategic move for investors looking to capitalize on Bitcoin’s performance. The trajectory of Bitcoin price, the pace of EH/s expansion, the impact of the AI Cloud business, and the management of electricity costs are key factors to monitor in assessing IREN’s future prospects. Investors should remain vigilant and stay informed on IREN’s operational metrics to make informed decisions about their investment strategy.