Is Terawulf the Next Big AI Stock?

Terawulf is a cryptocurrency mining firm that specializes in bitcoin.

It has a twist on mining, which is notoriously energy intensive. The unusual angle is it operates mining facilities that use clean, low-cost, and reliable energy sources.

The way it works, in a nutshell, is that the company uses specialized computers, known as application-specific integrated circuit miners, to perform computational work that validates transactions and secures the bitcoin network. Once it mines successfully, it earns bitcoin rewards and transaction fees, which it then sells for U.S. dollars.

What sets this bitcoin miner apart from so many others is it capitalizes on low-cost, zero-carbon power sources to keep its environmental impact low while maintaining reasonable cost efficiencies.

And while that’s an interesting angle, there might be even more to like about WULF than meets the eye.

Key Points

• Terawulf mines bitcoin using low-cost, zero-carbon energy and also provides hosting services for third-party miners to maximize its bitcoin holdings.
• It is diversifying into high-performance computing through its “WULF Compute” center, targeting AI and data analytics to create new revenue streams.
• The firm has strong cash flows and expanded capacity but faces risks from bitcoin volatility.

Is WULF an AI Stock?

It’s possible that the market hasn’t quite priced in yet the fact that TeraWulf is exploring opportunities in high-performance computing, and beyond cryptocurrency mining.

The company’s internal innovation center called “WULF Compute” is designed to develop scalable digital infrastructure to support HPC applications.

WULF Compute was built with a view to diversifying revenue streams beyond bitcoin mining, and taking advantage of increasing demand for high-density computing capabilities, including artificial intelligence, scientific research, and data analytics.

By adding an AI string to its bow, Terawulf has the potential to win over the Wall Street crowd who are eagerly scouring for the next big thing.

It’s worth noting that Terawulf isn’t a pie in the sky company that is pre-revenue with big ideas. Over and above mining its own bitcoin, it provides hosting services for third-party miners, including infrastructure support such as electrical power, internet connectivity, cooling, and maintenance resources.

To further support revenues and enhance its bitcoin holdings, it receives BTC as distributions from its joint venture in the Nautilus Cryptomine Facility.

It also routinely sells the bitcoin it earns through mining operations to support its business operations and growth. So far those revenues have amounted to $120 million and another $104.1 million of cash sits on the balance sheet to fuel new initiatives.

Is It Time to Buy Terawulf?

For a small-cap firm worth just north of a billion dollars, Terawulf has remarkably strong cash flows from operations. Management reported $39.2 million in cash flows in Q1 and Q2, a notable figure given the capital-intensive nature of the cryptocurrency mining industry.

It says two things to investors. First, consistent positive cash flow shows management is fully in charge of costs and secondly, the need to raise additional funds is low.

Another positive sign is that management repaid $63.6 million of its term loans during the six months ending June 30, 2024, which helps to lower interest expenses and improve the company’s balance sheet. The repayment also extended the excess cash flow sweep to the maturity of the term loans, providing more flexibility in managing its finances.

The financial improvements have meant that management can expand mining capacity. The filing mentions that the company’s Lake Mariner Facility has energized four buildings and infrastructure comprising 195 MW of capacity while the Nautilus Cryptomine Facility achieved full energization of its allotted 50 MW capacity.

The expansion in capacity puts TeraWulf in a good spot to increase its bitcoin mining output, especially if bitcoin prices remain stable or rise, which should support revenues and profitability.

It’s also been reported that the company has received all contracted miners from suppliers and has no remaining outstanding financial commitments under the miner purchase agreements, which means lower capital expenditures and preservation of cash flows going forward.

If it does run into a cash crunch, though, TeraWulf has an active at-the-market sales agreement to sell up to $200 million in common stock, with $103 million remaining as of last quarter. As a result, management has the flexibility to fund further expansion without taking on additional debt, a fact that may well help to stabilize or increase the share price.

What Could Go Wrong?

A caveat here is that TeraWulf has been actively issuing common stock to raise capital, such as the 63.8 million shares issued via a common stock offering.

On the plus side, the balance sheet looks healthier but it did come at the expense of diluting existing shareholders. Expect even more dilution and potentially a lower the stock price if management resorts to boosting share count to raise capital down the line.

It can’t be overstated either that the company is subject to the whims and volatility of bitcoin prices. Equally changes in government regulations or restrictions on digital currency mining, as well as increased competition from other miners, may well hurt the company’s operations and profitability.

Another factor that may hurt profitability is the high depreciation expenses of $29.2 million for the first half of the year, which includes $5.1 million in accelerated depreciation related to the replacement of certain mining equipment.

Is Terawulf the Next Big AI Stock?

Terawulf stock is likely to bounce back now that it can rely on a variety of revenue streams, the balance sheet cash is over $100 million, and cash flows are strong. Among seven analysts covering Terawulf, the net consensus puts fair value at $6.64 per share, which is substantially higher than the current share price.

The diversification into high-performance computing has the potential to be a growth avenue and insulate the firm against some of the reliance on bitcoin mining. Still, dilution risks and heavy reliance on bitcoin prices are reasons to be eagle-eyed when earnings reports are released. Indeed, the volatility in the cryptocurrency market and potential regulatory changes further fuel uncertainty.

When you weigh up the pros and cons, TeraWulf is a speculative investment that is probably most appropriate for those with a high-risk tolerance and who believe in the long-term potential of bitcoin and cryptocurrency mining.