HPC Expansion And Diversified Contracts Will Create Future Resilience

Key Takeaways

• Reallocating resources from Bitcoin mining to HPC infrastructure could drive future growth amid rising data center demands and diversified clientele.
  
• Debt restructuring and 0% interest funding improve growth potential and operational efficiencies through strategic hires, enhancing financial stability and earnings.
  
• Dependency on CoreWeave, shift in strategy, restructuring uncertainties, and execution delays pose risks to growth and profitability.

Catalysts

Provides digital asset mining services in the United States.

• Core Scientific secured a major HPC contract with CoreWeave, with a total revenue potential of $8.7 billion over a 12-year term, significantly boosting future revenue compared to their current levels.
  
• The company is expanding HPC infrastructure capacity by reallocating resources from Bitcoin mining, adding new sites, and extending existing ones, expecting to drive future revenue growth as data center needs rise.
  
• Core Scientific’s ability to diversify its customer base and reduce reliance on CoreWeave as a primary client could improve margins and provide more stable revenue streams in the long term.
  
• The improved balance sheet following significant debt restructuring and raising $625 million through a convertible note offering at 0% interest rates positions the company to effectively fund future growth initiatives with lower interest costs, improving net margins.
  
• Strategic hires of data center professionals enhance execution capabilities, likely leading to increased operational efficiencies, positively impacting earnings as the company grows its data center business.

Core Scientific Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Core Scientific's revenue will grow by 60.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -170.8% today to 23.0% in 3 years time.
• Analysts expect earnings to reach $334.4 million (and earnings per share of $0.83) by about September 2028, up from $-595.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $432.4 million in earnings, and the most bearish expecting $23 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.8x on those 2028 earnings, up from -7.0x today. This future PE is lower than the current PE for the US Software industry at 36.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.21%, as per the Simply Wall St company report.

Core Scientific Future Earnings Per Share Growth

Risks

• The shift from Bitcoin mining to HPC hosting and the resulting decline in digital asset hosted mining revenue, which was down significantly from $30 million to $6.5 million, could adversely impact overall revenue if the new strategy doesn't ramp up as expected.
  
• The company faced a net loss of $265 million in the fourth quarter of 2024, an increase from the previous year's loss, raising concerns about its ability to reach profitability and improve net margins in the near term.
  
• The dependency on a singular client, CoreWeave, for a significant portion of projected revenue introduces concentration risk. If CoreWeave's demand or business model shifts unfavorably, it could dramatically decrease Core Scientific's forecasted earnings.
  
• With the recent Chapter 11 debt restructuring, there remains uncertainty about the company’s long-term financial health and its reliance on future capital expenditures, which could put strain on cash flow and negate earnings improvements.
  
• The delayed rollout of planned HPC capacity expansions due to permitting and equipment issues could slow revenue growth and heighten execution risk, potentially impacting future earnings.

Valuation

• The analysts have a consensus price target of $19.045 for Core Scientific based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $334.4 million, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 9.2%.
• Given the current share price of $13.58, the analyst price target of $19.05 is 28.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.