Bitdeer: Bucking The Sector Trend?

Still one of the newest Bitcoin (BTC-USD) miners from a publicly traded equity standpoint, Bitdeer Technologies (NASDAQ:BTDR) is starting to make me look somewhat foolish for calling it a "hold" twice in the last five months.

Bitdeer is one of just three miners with a market cap over $1 billion. Many of the companies in the sector broke out of a consolidation range on June 20th. Since that breakout, BTDR shares are up over 20% while most of the other equities have completely retraced their breakouts.

The company has a fairly unique model among the other publicly traded mining firms because, among other business segments, it also sells cloud hash rate to retail consumers. In my last Bitdeer article published in late-June, I noted the difference in profitability between the company's self-mining and cloud mining businesses:

It appears somewhat apparent that selling the company's hash rate is a more profitable business than actually mining with the machines. Given that, I could understand keeping more of the proprietary mining capacity for the company if Bitdeer was actively trying to scale a BTC treasury. However, that doesn't appear to be the case.

We're now seeing an interesting change in some of the company's recent production updates and in the latest quarterly earnings report.

August Production

In the month of August, Bitdeer reported self-mining 383 Bitcoin. That figure tied the company with Bitfarms (BITF) for the 5th largest August production haul.

Source: Company filings, analyst's calculations

Like Riot Platforms (RIOT), which shifted capacity to energy credits due to the Texas heat, Bitdeer also took steps to curtail mining at its Texas facility though as far as I can tell the company didn't quantify what it earned from those credits. Bitdeer's 163 mined BTC increase over July gave the company the biggest aggregate month over month increase in the sector. That production growth was mainly attributable to capacity expansion at its Gedu Datacenter.

Source: Bitdeer

At the end of August, Bitdeer had 7.2 in self-mining EH/s versus 1.5 in cloud hash rate. In my view, the changes in these proprietary hash numbers are interesting because Bitdeer's capacity growth in the segment is coming from self-mining versus cloud hash services. Proprietary hash has doubled since August 2022 but the cloud hash rate EH/s is actually down 17% year over year. This could actually be negative for Bitdeer's bottom line because the cloud hash rate category has been more profitable than the company's self-mining segment.

Q2 Earnings

Looking at Bitdeer's second quarter 2023 financial performance, we see sequential revenue growth of 29% from $72.6 million in Q1-23 to $93.8 million in Q2-23. The growth in top line revenue was mainly attributable to the company's expansion of self-mined exahash.

Source: Bitdeer

While it was the highest top line revenue figure for Bitdeer since Q2-21, gross profit has been under pressure and was nearly cut in half from $27.6 million a year ago to $16.2 million during the most recent quarter.

Again, what we're seeing play out is a shift from the company's highly profitable cloud hash rate business to the lower margin self-mining business. Per the company's 6-k:

Proprietary hash rate was 6.2 EH/s as of June 30, 2023, with 4.6 EH/s allocated to the Company's self-mining business and 1.6 EH/s to its Cloud Hash Rate business.

At $18 million on 1.6 EH/s versus $21.6 million on 4.6 EH/s in the last quarter, Bitdeer's cloud business was roughly three times more profitable than the company's self-mining business:

Source: Bitdeer, analyst's calculations

As I detailed in my previous Bitdeer article for Seeking Alpha, profitability in the cloud hash segment is essentially dependent on the company's cloud hash customers making low, and in some cases negative, margins on their cloud hash agreements. Given that, it's no wonder overall margins have been declining to the degree that they have. Per the previously mentioned 6-k for Q2-23:

Cloud Hash Rate revenue was $18.0 million, compared to $34.9 million in the corresponding period of 2022, primarily due to changes in the amount of active Cloud Hash Rate orders.

Bitdeer likely needs another digital gold rush in the price of Bitcoin for those margins to return to where they were in 2021 and early 2022. To further the gold rush analogy, the company makes more from selling shovels to retail than from doing the digging themselves on a revenue per proprietary EH/s basis. Cloud hash rate is a great business if churn is low. But I'd wager we need to see BTC make a fresh all-time high for the larger public to get excited about mining BTC again. To be clear, that's entirely speculative on my part. Bitdeer might work as a great retail Bitcoin FOMO trade. But there currently isn't much FOMO in the market from where I sit.

Share Purchase Agreement

In early August, Bitdeer disclosed a $150 million share purchase agreement with B. Riley Principal Capital II. The impact on the shares outstanding will be dependent on what the average price of those share sold is. In a subsequent prospectus, Bitdeer shared the table below:

With this as a general guide, anywhere from 9.4% to 11.9% of Bitdeer's shares outstanding will be owned by B. Riley after the issuance. Per the prospectus:

We expect to use any proceeds that we receive under the Purchase Agreement for working capital and general corporate purposes. As of the date of this prospectus, we cannot specify with certainty all of the particular uses, and the respective amounts we may allocate to those uses, for any net proceeds we receive. Accordingly, we will retain broad discretion over the use of these proceeds.

At the end of Q2, Bitdeer had $130.2 million in cash and equivalents, $619 million in total assets, and $310.5 in total liabilities. At current share pricing, the cash raise through B. Riley is a fairly small amount of dilution relative to other mining peers.

Summary

Bitdeer continues to be a highly volatile, low volume Bitcoin miner. The balance sheet is in better shape than other BTC miners in the public equity markets and insider holdings of BTDR shares are high. The company has one of the more diversified models in the industry but there are definitely concerns to be aware of; specifically the decline in the company's most profitable revenue segment. I don't personally hold this one, but I wouldn't rule out a speculative long in the future. It's still a hold for me today.