Summary CleanSpark recently raised $1.15 billion via zero-interest convertible notes to fund an HPC/AI pivot and executed a significant share buyback. CLSK's net dilution from the convertible offering is about 10%, but the market reacted negatively, with shares dropping over 26% since the announcement. Based on updated book value estimates, CLSK trades at a P/B ratio of 1.6-1.7, which is not historically cheap and may compress further. Given ongoing Bitcoin price weakness and mining headwinds, I recommend waiting for a better entry point before considering CLSK as a swing trade. It has been over six months since I last covered CleanSpark ( CLSK ) for Seeking Alpha. At that time, the stock was trading at about $8 per share, and I called it a speculative 'buy' based on a technical breakout in the price of Bitcoin ( BTC-USD ) that I thought would propel CLSK shares higher. Data by YCharts While I've certainly had some Bitcoin miner calls that have not worked out as well this year, the CLSK 'buy' was well-timed. The stock rallied through spring and early summer before pulling back just before a monster run in September and early October that took shares of CLSK up north of $20 per share. It's been a rough go for CLSK shareholders since. In this update, we'll look at the company's recently announced convertible note offering and build a book value estimate based on the company's mining footprint and BTC holdings. $1.15 Billion Convertible Notes CleanSpark had long been one of the few Bitcoin miners that held off on the HPC/AI data center pivot. That recently changed. And while I'm not sure I'm the biggest fan of pivoting to HPC this late in the game , if CleanSpark is going to actually enter this business, it's doing so with a capital raise that I think is reasonably advantageous to the company. On November 10th, CleanSpark announced $1 billion in zero-interest convertible notes due in February 2032. That offering was up-sized to $1.15 billion shortly after. Per the terms of deal, the convertible notes are unsecured and are convertible to either cash, common at $19.16 per share, or some combination of the two at CleanSpark's discretion. Following the capital raise, CleanSpark spent $460 million of the proceeds and bought back 30.6 million shares at $15.03 per share. It's an interesting strategy because it cuts the potential shareholder dilution from converts by slightly more than half: Value Share Price Shares Converts $1,150,000,000 $19.16 60,020,877 Buybacks $460,000,000 $15.03 30,605,456 Net dilution 29,415,421 Source: CleanSpark, analyst's calculations So essentially, the company has raised roughly $690 million that it plans to invest in its HPC buildout. The net dilution of 29.4 million shares represents an increase of about 10% from the 281 million shares outstanding at the end of June. The market's reaction to converts has been quite poor, to say the least: Data by YCharts With Bitcoin down about 3% since CleanSpark's convertible note announcement on the 10th, shares of CLSK are down more than 26%. And while the mining sector is broadly down, CLSK has been beaten up a bit more than peers like Hut 8 ( HUT ) or MARA Holdings ( MARA ); each of which are similarly sized by market capitalization. Valuation Considerations With the caveat that we don't yet have calendar Q3 numbers for CleanSpark, given what we know about CleanSpark's convertible note details, we can build a rough estimate for the company's book valuation today based on the same 50 EH/s in operational hashrate that CleanSpark had at the end of Q2. Valuation Estimate Figures Bitcoin Holdings $1,251,168,000 Net Prop/Plant/Equip $1,350,000,000 Goodwill/Other assets $550,000,000 Post-Convert Cash $690,000,000 Total Assets $3,841,168,000 Total Liabilities End of Q2 $955,000,000 Convert Debt $1,150,000,000 Shareholder equity $1,736,168,000 Shares Outstanding 251,000,000 Book value $6.92 Source: Analyst's Estimate based on Q2 balance sheet, BTC value, and In this table, I've marked the company's 13,033 BTC to a market price of $96,000, which is the level that Bitcoin is currently trading at as I write this. I've also reduced the company's shares outstanding from Q2 by 30 million, given CleanSpark's recent share buyback. Given the updated shares and Bitcoin price, I think we can reasonably assume CLSK shares have a book valuation around $7 following the convertible note offering. At an intraday CLSK price of $11.50, I estimate CLSK is trading at a P/B ratio between 1.6 and 1.7. This is not a historically high P/B valuation multiple for CLSK shares, but it isn't necessarily cheap either: CLSK P/B History (Seeking Alpha) CleanSpark stock often experiences wild swings in price over very short periods of time. If we go back to last year, a price-to-book level between 1 and 1.2 has been a much better place to buy CLSK shares for a price bounce. However, it absolutely must be noted that during 'crypto winter,' CLSK traded at deep discounts to its book value. At one point in December 2021, CLSK traded at a price-to-book level of just 0.25. My point is, playing CLSK for a swing trade bounce at these levels may come down to where you think we are in Bitcoin's cycle. And unfortunately, I don't think we're at the bottom yet. Closing Summary I have made it no mystery that I've been highly cautious about Bitcoin's price setup for several months . If Bitcoin continues to decline in price, CLSK will almost certainly go down in sympathy. Despite the fact that the company is looking to branch out into HPC and AI compute, the fact of the matter is almost all of the company's assets are tied to Bitcoin's value. As of writing, Bitcoin's hash price has fallen under $40 PH/S per day. The economics of mining continue to be a major headwind for companies like CleanSpark, which I suspect is why mining peer Bitfarms ( BITF ) is positioning to exit the business entirely. I still think CLSK can serve as a terrific swing trade vehicle in the right situation. One of the things that I like to see when picking higher conviction swing trades in the mining stocks is a convergence of factors that I view as indicative of a short-to-medium-term bottom in price. Those factors include valuation compression, reaction to bad news or short squeeze potential, and a positive technical setup for BTC. Right now, I only see one of those factors for CLSK given the market's reaction to the convertible notes. And while I think the market reaction to CleanSpark's convertible note offering was probably a little bit overdone, history says valuation can compress even more. I don't think we're at the bottom for BTC yet. Thus, I'd wait before trying to catch the knife in CLSK.
