Hut 8's Data Center Deal Will Set It Apart From Peers, Analyst Says

Crypto miner Hut 8’s (HUT) acquisition of the cloud and colocation data center business from TeraGo could provide a key long-term competitive advantage, said Craig-Hallum analyst George Sutton.

“The blatantly obvious challenges facing bitcoin miners are the recent sell-off in BTC price and supply chain disruptions and, as expected, the stock price followed bitcoin’s trajectory,” wrote Sutton in a research note on Friday. However, he added, “What isn’t blatantly obvious is the impact HUT’s acquisition of TeraGo’s Data Center business will have on the company’s future.”

Sutton expects the deal, which closed on Jan. 31, will add about C$20 million (US$15.79 million) of “high-margin, run-rate revenue” for Hut 8, allowing the company to offset the cash burn from its “HODL” strategy of keeping nearly all of its mined crypto. “Our long-term view is the data center business could eventually scale to a level where fiat profits [generated from the data center business] fully cover corporate overhead,” Sutton said.

Hut 8 paid C$30 million in cash in January to buy the TeraGo data center business and brought over about 400 commercial customers across a variety of industry verticals including gaming, visual effects and government agencies. Given Hut 8 CEO Jaime Leverton’s background of 20 years in the data center business, the miner “now has a familiar asset to monetize with a unique vertical focus,” Sutton wrote.

The data center business is totally uncorrelated to digital asset mining and will help Hut 8 weather some of the market volatility that comes with being a bitcoin miner, while serving “deeply underserved” markets for Web 3 infrastructures, Hut 8 Vice President of Corporate Development Sue Ennis told CoinDesk in an interview.

“We really think it's a tremendous opportunity to complement our [mining] operations,” she said, adding that with the deal the company is taking a long-term view on Web 3 and setting the stage to service the industry as it grows. “The way we look at it is that you don't really need to bet on who the Web 3 winners are going to be when you own the racetrack,” Ennis said.

Shares rose but remain under pressure
Hut 8 shares fell initially on March 17 after the company posted a surprise loss for its fourth quarter and fiscal 2021 results. The decline was short-lived, though, and the stock bounced back for a 7% gain by the end of the session. Still, HUT remains lower by nearly 70% since hitting an all-time high late last year, the shares falling alongside the big drop in the price of bitcoin.

The reported miss on Q4 income was mainly due to a revaluation of some of the warrants the company issued in 2021, which is now classified as liability of $114.2 million. “This is a standard practice for any company that has warrants outstanding,” Ennis said, noting that Hut 8 has the fewest amount of warrants among peers.

While the warrant revaluation made a big impact on GAAP earnings, said Ennis, investors should really be focused on results without the warrant liability - positive earnings of $0.31 per share versus the GAAP reported loss of $0.54.

HUT’s shares are down just over 2% while bitcoin has slipped by roughly 1%.