CleanSpark: Extremely Compelling Valuation Drives Bull Case

Summary:

• CleanSpark’s stock has broken down significantly, but its valuation and scale in Bitcoin mining present a compelling buying opportunity despite high short interest.
• CleanSpark’s capacity expansion and substantial Bitcoin holdings enhance its competitive positioning and potential correlation with Bitcoin’s price.
• The stock’s valuation against Bitcoin has contracted without fundamental reasons, suggesting a potential upside as this contraction unwinds.
• I reiterate a Strong Buy rating for CleanSpark, anticipating significant returns if Bitcoin breaks out of its bullish consolidation pattern.

The ongoing consolidation in Bitcoin has lasted longer than I would have expected pre-halving, but we have to trade the market we have, not the market we want. That is quite the case with Bitcoin miner CleanSpark (NASDAQ:CLSK), which I last covered six months ago. The stock was in the mid-teens at the time, testing key support around $15. I liked CleanSpark then, and while it bounced around some, it ultimately failed that support level a few months later.

CleanSpark shares have very clearly broken down and look bearish, but I believe the valuation supports the bulls that are brave enough to take the plunge. Keep in mind that short interest is very high on CleanSpark at about 18%, so it’s a volatile stock, to say the least. However, if you are interested in owning CleanSpark, now may just be the time to consider building that position. Let’s dig in.

A bearish breakdown, but nearing support again

There’s no denying that the stock broke down in a massive way in August. The absolutely critical support level of $14/$15 gave way and the stock never looked back.

Shorts have pressed the stock down to under $9 again, a level that was previously not seen since the early stages of this year. The stock is below the moving averages, the PPO is well into negative territory, and the RSI hasn’t seen 60+ since July. In short, there’s nothing bullish here.

What’s really interesting is that while CleanSpark’s chart looks awful, that of Bitcoin itself actually looks pretty good.

This is a three-year weekly chart, and we can see some very bullish developments. I see a bull flag that has formed, which is comprised of the “pole” from summer of 2023 to the peak in spring of 2024, as well as the “flag” that has formed in the channel I’ve drawn above. A bull flag is a continuation pattern, so as long as the flag doesn’t break to the downside, we should plan on seeing higher prices in the months to come.

On the bullish side of the ledger, the weekly PPO has been reset and is stabilizing near the centerline. That has coincided with two tests of the 50-week moving average (in blue above), and I fully expect we will not break the 50-week moving average.

On the charting front, CleanSpark looks awful while Bitcoin looks like it is nearing the end of a bullish consolidation. What to do then? Let’s take a look at the fundamental picture on CleanSpark first.

Building capacity (and profitability)

CleanSpark has spent years building its capacity to mine Bitcoin, and very much continues to do so.

The company is the second-largest Bitcoin miner as measured by realized hash rate, which now stands at over 26 EH/s. While that alone is not a reason to own the stock, Bitcoin mining is all about scale and efficiency, and being a huge player is a big head start towards efficiency.

The company expects 32 EH/s by the end of the year as it continues to bring capacity online via acquisitions and organic growth. That growth will continue to come in handy because the difficulty in mining Bitcoin is growing all the time.

This is a one-year chart, and we can see that – on the bright side for miners – difficulty has been stable since the halving in April. It climbed significantly into that event, however, so year-on-year, mining is still much more difficult than it was. That is the long-term trend, of course, so adding capacity simply helps to offset this rising difficulty. However, CleanSpark is adding capacity quickly enough it can both overcome this rising difficulty, and mine more Bitcoin over time. Its competitive positioning from a scale perspective against the other miners makes it attractive, in my view.

The other wrinkle here is that CleanSpark is not just a miner; it now has a pretty sizable hoard of Bitcoin on its balance sheet.

The company owns almost 8,000 coins, which are worth roughly half a billion dollars today. Given this, as the company continues to mine Bitcoin and hold them on the balance sheet, its share price should become ever more correlated to the price of Bitcoin itself. And with the balance sheet we see below, CleanSpark has the ability to hold (rather than sell) most of the Bitcoin it mines.

This slide is a bit of an eye chart, but the important bits are the stockholders’ equity (~$1.4 billion) and basically non-existent long-term liabilities. CleanSpark’s balance sheet really couldn’t look much better, so it has little to no financing risk. With some miners/owners of Bitcoin using significant leverage, CleanSpark stands apart in this way.

What about the valuation?

This is where things get pretty interesting from my perspective. CleanSpark’s price chart is terrible, and there’s no point in arguing about that. However, with CleanSpark being a massive player in mining, having ~$1.4 billion in book value on its balance sheet, and owning a large number of coins, the below chart is slightly confusing.

Since the middle of July, CleanSpark’s price against that of Bitcoin has fallen 54%. The share price has fallen about 56% from that point, meaning the entirety of the decline in the share price has been due to a valuation contraction against Bitcoin. I don’t see any fundamental reason for this decline to have occurred based on the above discussion, although we do know that these valuation boom/bust cycles do occur from time to time. I cannot help but think this contraction is going to unwind at some point and that it will drive an upside in the stock.

Finally, on the valuation front, this is the same chart of CleanSpark’s share price against that of Bitcoin, but for five years to give us a long-term perspective.

I’ve put a line where the ratio stands today, and we can see that for nearly all of the last five years, CleanSpark’s valuation against Bitcoin has been much higher than it is today. Does that guarantee we will get a higher share price? Obviously not. However, does it put the odds in the favor of the bulls? I believe it does.

The stock is still a long candidate

If we wrap all of this up, I see a stock with an extremely attractive valuation, but also very high short interest. The ~$15 level on the price chart will be tough to get through if/when the stock gets there, but at under $9 today, there’s a lot of room between here and there. On the downside, we have support near $7 and $8, so we’ll see if that holds.

The company’s scale in an industry where scale is absolutely critical is a plus point for the bulls. I also believe the valuation as measured by the share price against Bitcoin is a big plus for those that are bullish.

We’ll see what happens, but if I’m right about Bitcoin breaking out of its bull flag, and that CleanSpark’s valuation has much more upside potential than downside from here, we could see CleanSpark produce some pretty spectacular returns from this point.

I’m reiterating a Strong Buy, but keep in mind this one is very volatile and not suitable for all risk tolerances.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CLSK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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