TeraWulf is an undervalued stock, ATB Capital says

The promise of AI seems limitless, as least if one to believe the breathless headlines published every day in the tech sector.

But the reality is often much more mundane and ATB Capital analyst Martin Toner has found a way for investors to profit from this juxtaposition.

In a research update to clients January 5, Toner initiated coverage of TeraWulf (TeraWulf Stock Quote, Chart, News, Analysts, Financials NASDAQ:WULF).

Founded in 2021, WULF is a digital asset company that operates a decommissioned coal-fired generation
plant in New York state called Lake Mariner that has the potential to house 750MW of capacity.

The analyst says rather than focusing on mining itself, WULF has the ability to address the AI power bottleneck.

“Evidence suggests that access to power is a bottleneck in the AI investment cycle. Hyperscalers are building GW scale data centers and we believe there are dozens of other potential customers for HPC/AI data centers,” he wrote.

The analyst says WULF is deserving of a multiple higher than that of a mere miner.

“Data Center REITS trade at a premium to BTC miners (25x EV/EBITDA vs 5x EVEBITDA) and we believe the HPC business doubles EBITDA per MW. We estimate the uplift from being a pure-play BTC miner to an HPC data center is potentially a 10x improvement for shareholders. We believe the simple math should get investor attention,” the analyst added.

Toner has launched coverage of WULF with an “Outperform” rating and a price target of $10.50, implying a return of 68.8% at the time of publication.

The analyst thinks the company will post Adjusted EBITDA of $60.2-million on revenue of $140.5-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $129.2-million on a topline of $298.9-million in fiscal 2025.

“Our price target is based using a blended average of a sum-of-the-parts (SOTP) and multiples-based approach and a DCF. We value WULF’s HPC assets using a multiple of 22x 2026 EV/EBITDA (based on data center REIT comps) and our discounted cash flow (DCF), using a weighted average cost of capital (WACC) of 9.7% and a terminal growth rate of 3.5%. Our DCF model implies a terminal EV/EBITDA multiple of 13x in 2033. Our discounted terminal value of $3.9bn represents 91% of our total estimated EV of $4.3bn. Our valuation implies an EV/2026 EBITDA of 25.7x,” Toner concluded.