The fundamental concept of value investing is identifying stocks that are priced too low relative to the underlying performance and future prospects of the company. While sometimes difficult to find, such mispriced stocks can generate incredible returns over time.
One under the radar stock that is trading quite low while producing excellent growth and margin metrics is Canaan (NASDAQ:CAN). Canaan is a Chinese company engaged in computer chip design and manufacturing. Its main focus is on supercomputing technology for ASIC Bitcoin mining rigs, which it manufactures and sells.
Revenue and Growth
In Q4, Canaan generated a net revenue of RMB 2.18 billion, up more than 65 percent from the previous quarter. Full-year revenue reached RMB 4.99 billion, more than 10 times the previous year’s total. These growth metrics alone demonstrate Canaan’s extremely rapid advance in the last year.
Margin was another bright spot for the company. Gross margin in Q4 was 68 percent, resulting in a gross profit of RMB 1.49 billion. Margin in Q4 was substantially higher than for the rest of the year, but the full-year total margin worked out to 57.2 percent.
Other growth metrics also showed Canaan’s business expanding rapidly. Total computing power sold, measured in terahashes, rose 238.5 percent year-over-year in 2021. Sales to new customers accounted for 41 percent of all sales in 2021, showing a significant increase in Canaan’s client base. Additionally, the company saw strong demand in emerging markets such as Malaysia, Peru and Argentina.
As the demand for Bitcoin mining rigs continues to rise, Canaan must deal with competition from other companies trying to win in this lucrative market. Three of Canaan’s closest direct competitors are Innosilicon, Bitmain and Microbt, all of which manufacture comparable mining rigs to Canaan’s.
Of these, Bitmain is likely the largest challenge to Canaan. Both companies manufacture multiple rigs in the 40-70TH/s processing range, allowing them to appeal to a wide range of customers. Bitmain, however, does have the edge when it comes to delivery times.
How High Could Canaan Go?
There is only one outstanding analyst forecast for the company, which is extremely bullish, putting Canaan at $14.34 over the next 12 months.
While this would represent an enormous upside of nearly 250 percent against its current price of $4.10, it’s important to remember that it’s only a single rating.
Without a larger pool of forecasts, it’s difficult to see more bearish estimates for comparison.
Canaan’s biggest and most obvious risk factor is its dependence on the continued growth of Bitcoin prices. While bulls expect cryptocurrency to someday account for a large portion of global economic activity, more traditional investors often see these currencies as a bubble created by excessive market enthusiasm.
In line with this school of thought, Warren Buffett has reminded people many times over the years that Bitcoin is a non-productive asset, making it a poor long-term investment. Needless to say, a substantial correction in the cryptocurrency market would pare demand for Canaan’s miners.
Being based in China, Canaan must also contend with the disruptions caused by the country’s zero-COVID strategy. Rolling lockdowns have disrupted supply chains and kept workers out of factories. If this state of affairs continues throughout 2022, Canaan may have a difficult time keeping pace with its 2021 growth.
Is Canaan a Buy?
Simply put, Canaan’s growth and margin metrics are outstanding. The company’s rapid advancement, excellent profitability and entry into emerging markets make it extremely attractive. While analyst forecasts are virtually nonexistent, it’s relatively clear that Canaan could have a very good year ahead and produce substantial returns for investors.
The stock is also exceptional from a value perspective. Shares of Canaan currently trade at a P/E ratio of just 1.37, compared to 29.63 across its industry. Price-to-book and price-to-cash-flow are also extremely low, standing at 1.04 and 1.97, respectively. These metrics have earned Canaan a Zacks value rank of A, suggesting that the company is undervalued at its current price.
With all of this said, Canaan’s fortunes are tied to a highly volatile market that could begin to lose its steam in the coming years. While cryptocurrencies have produced incredible returns over the last decade, it’s still unclear how well they will perform in the long run.
At worst, the cryptocurrency market could prove to be in a bubble, a development that would create massive headwinds for mining rig manufacturers like Canaan. Paired with the current uncertainty surrounding the Chinese economy, this gives Canaan a fairly large amount of business-related risk.
Overall, Canaan is a high-risk, high-reward stock that will be suitable for investors who are bullish on crypto and comfortable with volatility. Despite the risks, there’s no denying that Canaan is producing exceptional growth and is trading very inexpensively relative to its performance.
For risk-tolerant investors, Canaan is likely a good buy, though its inherent risks may make it more suitable for a small, aggressive growth portion of a larger portfolio.