Sphere 3D is a Buy in crypto-mining, PI Financial says

PI Financial analyst Kris Thompson is coming around on Sphere 3D Corp (Sphere 3D Stock Quote, Chart, News, Analysts, Financials NASDAQ:ANY) maintaining a “Buy” rating and target price of $10/share to imply a return of 333 per cent in an update to clients on Friday.

Founded in 2009 via reverse takeover of T.B. Mining Ventures and headquartered in Toronto, Sphere 3D provides enterprise storage management and cloud solutions, though it is in the process of pivoting to a Bitcoin mining operation.

Thompson’s updated analysis comes after Sphere 3D signed a $1.7 billion deal to add 60,000 next-generation NuMiner NM440 machines. Thompson noted the deal appears to be accretive but would need more information to update his financial model.

“One important question is where will the machines be hosted as they will require a lot of power up to about 530MW per our calculations,” Thompson said. “This and the power costs will be required in order to update our financial model.”

The purchase price will be paid out as $29 million in cash, $400 million in Sphere 3D stock, up to $1.1 billion in vendor purchases, and up to $185 million of additional milestone payments. In addition, the company also has the option to purchase an additional 60,000 NM440 machines. (All report figures are in US dollars.)

The NuMiner NM440 machine delivers 440 TH/s at a power efficiency ratio of 20.2 joules per terahash, which translates into a range between $58 and $65 per terahash. The machines are expected to deliver 26.4 exahash per second, which is approximately 13 per cent of the global network hash rate over the past seven days.

The NM440 is being produced in coordination with technology suppliers, including Taiwan Semiconductor Manufacturing Company, Foxconn and Xilinx, with deliveries expected to start in the second quarter of 2022.

The deal compares favourably to the $897 million order by Marathon Digital Holdings for 78,000 units of Bitmain Antminer S19 XP mining machines, to be delivered through 2022, which equates to approximately $80 per terahash.

The anticipated delivery schedule is 12 pre-production NM440s for final evaluation and testing to be completed on or before June 1, 2022, 1,000 miners in June 2022 and approximately 10,000 per month from September 2022 to February 2023. 

This deal, combined with the company’s previous merger with Gryphon Digital Mining and its previous contract to purchase 60,000 Bitmain Antminer S19j Pro miners, would make Sphere 3D larger than Marathon, according to Thompson.

“Sphere 3D is proud to be NuMiner’s launch partner. We continue to focus on the growth of our mining operations, and the agreement to purchase the NM440 provides us the ability to increase our EH/s capacity on order by 440 per cent over the next 13 months. The NM440 should also increase our overall efficiency, further improving margins and profitability as we scale our mining operations,” said Peter Tassiopoulos, Chief Executive Officer of Sphere 3D in a February 3 press release. “The reduction in energy consumption per TH/s further exemplifies our shared commitment to ESG leadership in the industry.”

Sphere 3D’s most recent financial reports came in November, where the company reported $1.04 million in revenue for a 17 per cent year-over-year increase over the same quarter in 2020. The company also reported gross profit of $485,000 to imply a gross profit margin of 46.6 per cent, a drop from the 60 per cent implied margin from the same quarter of 2020.

The company reported a $2.4 million net loss in the quarter, more than doubling the $1.19 million net loss in the same quarter of 2020.

Sphere 3D’s consolidated balance sheet indicated total assets valued at $223.8 million, with $100.5 million in cash compared to the $461,000 in cash the company had as of December 31, 2020. Meanwhile, after having $1.1 million in debt to end 2020, Sphere 3D’s most recent statement indicated the company as being debt-free.

Thompson maintained his valuation, albeit with a slight downward adjustment to reflect the additional risks surrounding the closing of the merger transaction, and the earlier stage of a rapid growth profile.

“The entire bitcoin mining complex has sold off in recent weeks as the price of bitcoin has collapsed and the global hashrate has climbed,” Thompson said. “We will reset our bitcoin and hashrate assumptions, and reevaluate our target price once more details become available on the Numiner deployment.”

Sphere 3D’s stock price has gone downhill, producing a loss of 21 per cent over the last 12 months and a 19.1 per cent drop since the start of 2022. Sphere’s stock value hit a 52-week high of $9.40/share on September 2, the end of a spike that began after hitting a 52-week low of $1.33/share on May 24.