Tremendously undervalued compared to leading competitors
Crypto assets were in freefall last week and have for the most part stabilized. In market conditions like these the cream of the crop tends to outperform. LM Funding America (NASDAQ: LMFA) recently announced its entrance into the cryptocurrency mining space with an initial purchase of 1,000 state-of-the-art Bitcoin mining machines. Shares responded strongly but have come back down to earth since the initial news. The company followed up with an additional purchase of 4,000 machines, and so now, the company is building an impressive crypto mining facility with over 5,000 powerful ASIC mining machines capable of mining Bitcoin at a rate of ~500PH/s. These rigs are expected to be operational by Q3 2022, and are expected to generate 100 Bitcoin (BTC-USD) per month. LM Funding’s CEO stated:
“In September, we began to purchase Bitcoin mining machines as a cost-effective way to purchase Bitcoin assets at a risk-adjusted exposure to the ecosystem while generating positive operating income. Our initial plans have expanded with the purchase of an additional 4,000 miners at favorable prices. We plan to run all of our mining machines with low carbon energy housed in custom built containers purchased from Bit5ive.” Rodgers finished by stating, “Once installed, we currently anticipate these 5,000 mining machines could generate approximately 1,200 Bitcoins per year beginning in the second quarter of 2022.”
As investors digested the news over the next month, and the company announced an upside $30 million stock offering, the shares reached highs for the year, almost doubling in price from about $4 to around $7.50. Essentially the company is transforming its legacy business of helping companies collect on HOA delinquencies into an incubator for gathering valuable Bitcoin. This gives what could be considered a fairly low growth business model into a high growth business model given Bitcoin has returned over 50x in the last 5 years.
Acquisition of Miners Below Spot Pricing
The actual key piece of information investors need to understand is that LMFA acquired its S19J Pro Antminer machines from Bitmain Technologies for $31.6M (about the entirety of their recent equity raise) which represents a purchase price of over $6,000 per machine, which is about half of what those machines go for normally. The spot pricing for these machines can actually be up to $15,000-$16,000.
What this means is that LMFA will be mining about twice as much Bitcoin as its competitors per cost of mining machine. Or, one can look at it as if their cost of mining will be almost half as much, if not taking into account the ongoing costs of mining.
Many investors expect Bitcoin to quickly reach $100,000 by the end of the year and increase in value beyond that. With a run rate of an expected 1,200 Bitcoins mined per year once these miners are commissioned, the company is looking at $120 million worth of Bitcoins mined every year to supplement its legacy business. The question is of earnings margins as well as cost of IRR.
The simplest way to value LFMA’s crypto mining business is to compare it to well-established ad well known top crypto mining companies, Riot Blockchain (NASDAQ: RIOT) and Marathon Digital Holdings (NASDAQ: MARA) based on all of the companies’ forward-looking, expected hash rates, which determines how fast they mine Bitcoins that can be sold or put on their balance sheet.
Riot has just updated its expected hash rate as 8.6 EH/s (1018 hashes per second) with the use of an expected 81,150 next-generation Bitcoin mining ASICs. The company is managing this high hash rate by using immersion cooling, putting its miners in a special fluid to keep them cool. Marathon, on the other hand, is expecting its 133,000 miners to mine at a rate of 13.3 EH/s, which is likely going to be one of the largest operations globally. The key is that it doesn’t matter how the companies get their hash rate up. What is most important is that they profitably mine the Bitcoin, whether using innovative cooling technology or purchasing the mining machines for less.
LM Funding is also pursuing an innovative deployment of its mining machines, using the Pod5ive for a lower cost factor and physical footprint.
If LFMA were to be valued in-line with peers ($0.35/(GH/s)), it would be worth 150% more than its current valuation, or $13.50/share. With the company’s low cost of acquisition as well as a novel, low cost and easy setup for new modules using the Pod5ive, it deserves a price per hash rate multiple similar to leading peers as it should be able to keep up with the growth of its peers, especially given its smaller size.
Investors, at first glance, have a hard time understanding how a company for outsourcing the management of delinquent accounts could become a significant player in the Bitcoin mining industry. However, when one scrolls through the numbers, it becomes clear that LMFA shares are undervalued compared to their peers, which trade primarily on their mining capacities.
The fact of the matter is that these LM Funding mining machines, when up and running, simply make money, regardless of who owns them. The relative valuations between Bitcoin miners should only vary slightly based on their ongoing costs of electricity, hosting, and maintenance. With LM Funding’s cost-effective purchase of the machines as well as their deployment in modules with limited footprint as well as ongoing energy and management costs, shares are ripe for a repurchase in-line with their peers.
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Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.