Applied Blockchain: Intriguing Model But Overvalued (NASDAQ:APLD)


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As Bitcoin (BTC-USD) has decreased from $ 69,000 to $ 20,000 in the last 7 months, Bitcoin miners have been severely affected. Many of them have dropped between 80 and 90 percent since their November 2021 peaks.

Performance Since 12/12/21

Performance From 12/11/21 (Searching for alpha)

What has hurt business models for the entire crypto mining industry has been the rise in energy costs along with the decline in the price of Bitcoin. For more information on this, check out my article on Iris Energy Limited (IREN) from about a month ago. Despite the putrid investment climate for crypto mining companies, Applied Blockchain (NASDAQ: APLD) recently completed a listing on Nasdaq. The organization has undergone a name change and a business change over the past year.

It was formerly called Applied Science Products and ran an Ethereum internal mining operation (ETH-USD). Assuming Ethereum makes the transition to a PoS (participation test) consensus mechanism, this mining pivot is probably a good idea. The company sold those mining assets and changed course. Unlike other mining companies, Applied Blockchain now has a very different revenue generation model.

Business model

Instead of owning a large amount of ASICs and extracting as many coins as possible, the company opts to lease locations to customers who use the company’s mining facilities for a service fee. Applied Blockchain describes the business model as follows:

The Company has a placement business model in which customers place their own hardware on the Company’s premises and the Company provides full operational and maintenance services for a fixed fee. The Company usually enters into long term fixed rate contracts with our customers.

In my opinion, this makes Applied Blockchain more similar to a company like Compass Mining than most other listed mining organizations. There is an argument to be made for this type of mining approach. The real mining business has quite a few limits in advance and the platforms must be maintained from their purchase to their eventual obsolescence. With Applied’s placement model, revenues are fixed and more stable than real mining operations would be. While this means that revenue growth is limited to location capability, it also means that revenue should have a reasonable floor as long as Applied prices remain competitive and the company’s customers maintain solvency even when the cryptocurrency market is struggling. .

Next generation data centers

As a hosting site, Applied Blockchain is essentially a data center provider. The company noted both on its May investor platform and during its quarterly earnings call that there is a considerable advantage in the “Next-Gen” data centers that the company is building compared to traditional data centers. In the last call, CEO Wes Cummins said this:

The next-generation data centers we are developing are optimized for high computing power and require more power than traditional data centers that are optimized for data retention and retrieval. Next-generation data centers have very different designs, Internet connection requirements, and cooling designs to accommodate different power demands and customer requirements. Therefore, we believe that we have developed a core competency with our team that will be difficult to replicate, especially for traditional data center operators.

Large differences in design and energy costs mean that traditional data centers will have a very difficult time adjusting to accommodate the mining business if they so desire. It also means that jurisdiction is important because mining operations depend on very competitive electricity costs. The company currently has live operations in North Dakota (Jamestown) and plans to set up accommodation in Texas and Oklahoma.

Development Plan

Development Plan (Block chain applied)

From a growth perspective, the company expects 1.8 GW of capacity in the next 2 years and 5 GW of capacity in the next five years. This growth in capacity comes with a focus on geographical diversity that takes into account the risk of political jurisdiction and allows for emphasis on the use of renewable energy. With a capacity of 5 GW, the company projects a 40% EBITDA margin. In the call, Cummins said Applied Blockchain estimates that demand for its services is growing faster than it can supply the market:

Our internal estimate is between 5,000 and 6,000 megawatts of hosting capacity needed to connect over the next 12 months to meet the publicly stated goal of publicly traded mining companies in North America.

If those estimates come to fruition, Applied Blockchain should be able to sell mining capacity and generate more stable revenue for the business without much hassle.

Valuation

In both the latest call and the May investor platform, Applied Blockchain mentions the company’s transition to a more REIT structure. In the deck, the company cites REITs Digital Realty Trust (DLR), Equinix (EQIX) and Innovative Industrial Properties (IIPR) that have models similar to those they expect to become. Based on those partners, Applied is very expensive based on multiple sales:

APLD DLR EQIX IIPR
Price / sale TTM 37.69 8.03 9.03 12.55
EV / FWD Sales 18.87 11.06 9.53 12.30
EV / TTM Sales 135.86 11.53 10.89 15.65

Source: Seeking Alpha

If we see more Applied Blockchain through the lens of a mining company, it’s even more expensive:

APLD CABANA MARA REASONS
Price / sale TTM 37.69 2.05 3.61 1.84
EV / FWD Sales 18.87 1.55 3.26 1.46
EV / TTM Sales 135.86 1.72 5.82 2.08

Source: Seeking Alpha

Depending on the company’s value for sales of both an advance multiple and a multiple, Applied Blockchain’s valuation is a bit rich compared to the REIT and mining model peers.

Risk

In the last quarterly presentation, Applied Blockchain listed its customers with hosting contract. Those entities are JointHash Holding Limited, Bitmain Technologies Limited, F2Pool Mining, Inc. and Hashing LLC. In addition, the company settled the debts of 3 of the customers while maintaining the confidentiality of the names.

Concentration of customers

Concentration of customers (Block chain applied)

In my opinion, the concentration of customers is high, with 62% of the total to be charged. On top of that, the mining business is facing serious problems with the margins adjusting. As I mentioned in my Iris Energy article last month, the highest hash rate and the lowest cryptocurrency prices are exactly the opposite of what mining operators want. If this continues, some miners may face solvency problems.

Summary

In my opinion, Applied Blockchain is an interesting version of the typical listed cryptocurrency mining companies. I think in a diversified stock portfolio with an emphasis on cryptographic and blockchain technology, Applied Blockchain is probably one to keep in mind. Personally, I don’t like this assessment. I think there’s a pretty big customer concentration risk right now, and I’d like to see Applied Blockchain’s credits depend a little less on an entity’s success. I can’t recommend it here. But I think it’s one to watch out for.



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