The Practical Islamic Finance Podcast

Mispricing!

Rakaan Kayali

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Mispricing!

In this episode, we will cover:

  • Intro & Market Reaction to Iris Energy
  • Q3 Earnings Highlights
  • Bitcoin Mining vs. AI Business Pivot
  • Revenue, EBITDA & Profit Analysis
  • Future Outlook: 50 EH/s by June 30
  • Mispricing & Valuation Multiples
  • Potential AI Partnerships & Hyperscaler Deals
  • U.S. Domestic Issuer Catalyst
  • Final Thoughts & Audience Q&A 

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DISCLAIMER
Anything you hear in this video is an opinion. It is not personalized financial advice. Make sure you do your due diligence before making any investment decisions.

As-salamu alaykum, folks. I hope you are doing well. The IS Energy earnings is actually just going on right now. And by the way, today is Wednesday, May the fourteenth. And so I've been trying to get you my reaction to it as soon as possible. So far, the market's reaction to it has been relatively positive, up three percent after hours. We're going to go through their investor presentation. I think largely this was a positive update. And I do think there is a mispricing going on. in relation to iris energy that may actually correct itself in the near term so let's talk about that so this company is so far ahead of its time they're actually reporting q three of twenty twenty five and the highlights here q three highlights that is consecutive quarters of profit after tax which is something that Not many Bitcoin miners can claim. Bitcoin mining is a very tough industry and it only gets tougher the more efficient ASICs become, the mining equipment that is, and the more players enter the field. And so basically, if you're turning a profit after tax, then you're in the elite. And so this is a big statement for Iris Energy, yet another quarter of profit. Record revenue of close to one hundred and fifty million. Keep in mind, this is a market cap that is less than two billion, right at one point seven eight billion. And so. you know, if we were to annualize this revenue, we're talking about six hundred million trading at one point seven billion. That's that's pretty good. Multiple their record adjusted EBITDA. Eighty three million profit after tax. Twenty four million. Not that impressive. But again, Bitcoin mining is a really tough business. And so if you're able to to be above water, You're an elite operator. And I say this and why this is very relevant is because Iris Energy is basically a business that is pivoting from Bitcoin mining to AI and high performance computing. Because Bitcoin mining, as I said, is a very tough business to be in and there are better margins to be had in high performance computing. And so what this tells us here is that management really executes at a very high level. And so this gives me confidence in their ability to pivot. They mentioned, I think close to a year ago, that they would get to a hash install capacity by June thirtieth, and that is still uh the target so they're on target to reach fifty x a hash by june thirtieth revenue is increasing for their ai cloud business it's still a very small portion of their business but it is increasing it's headed in the right direction and they have a massive build out of ai data centers that are looking for partners and I think they will have partners just because of the scarcity and demand uh the the scarcity of energized data centers and the high demand for them. And so that continues a pace, which is great. Looking at the comps, they're very good. So when you look at revenue, even quarter versus quarter. So in terms of the previous quarter, we had close to a hundred and twenty million. Now we have close to one hundred and fifty million in revenue adjusted EBITDA. You know, Charlie Munger used to call them bullshit earnings. So we'll we'll skip over the EBITDA, especially the adjusted EBITDA. But the profit after tax grew close to thirty percent from eighteen point nine million to twenty four point two million, which thirty percent. I mean, that is when. quarters we're not talking year over year we're talking from one quarter to the next growing profit at thirty percent is very healthy um and that sorry oh that's the earnings call concluding uh shout out to uh iris energy for their choice of Shout out to, sorry, I had another window that had their earnings call going. So that's the tune that they chose, I guess. They really are Texans. All right, so if you look at their, now this is probably the most impressive stat that they have here. And it's impressive. If you're familiar with other Bitcoin miner costs, the all-in cost per Bitcoin mined for Iris Energy is at forty one thousand versus the revenue that they're able to generate is ninety three thousand. That's great. That's better than CleanSpark, certainly better than something like Marathon Digital. They're basically best in class. And again, this speaks to the quality of management. And really, the most important asset any company has is their human capital. And so this is what you can hang your hat on. Okay, they're moving from Bitcoin mining to something else. Are they going to be successful? Well, when you look at the job they did in Bitcoin mining, it was quite impressive. They're actually, I think... one of the best if not the best out there uh so install capacity currently is uh for the exahash by the way this exahash capacity more than tripled in the last year which is very impressive if you look at now you know if you'll humor me here and I again I just got done you know calling it earnings but if you if you look at the ebitda uh that is estimated for uh fifty uh at fifty x a hash on june thirtieth the earnings before interest taxes depreciation and amortization if you look at that that's around five hundred and eighty eight million now historically speaking if we look at what do bitcoin miners trade for uh well And I will pull this up because I asked Kroc before I went live. So Bitcoin mining companies like Marathon Digital, Riot Platforms have historically traded at EBITDA multiples ranging from five X to fifteen X. So in bear markets closer to the five X in bull markets closer to fifteen X, the EBITDA the EBITDA number. This is what historically they've traded at. So I'm not talking about, okay, this is what you should use. You should use EBITDA. I'm not saying that, but I'm saying historically, these are the multiples that they've traded at between five X and fifteen X of EBITDA. Now, if we look here at the EBITDA that is expected at fifty X a hash on June thirtieth, close to six hundred million and this assuming a ninety five thousand dollar price for bitcoin we're now above a hundred who knows how high we go but assuming a ninety five thousand price for bitcoin and I expect we'll go a lot higher at six hundred million ebitda if you do a five x to that which is the bearish uh assumption Again, we said five to fifteen X. So if you do a five X of the six hundred million, we're at three. We're at three billion. If you do a fifteen X, we're at nine billion. So. Right now, as I said, we're trading at one point seven eight billion. So I said in a previous slide, I thought I was energy could get to five billion. You know. I was pretty confident that we could get there in short order. And so this kind of confirms that. If we're talking historically speaking, looking at Bitcoin miners, what multiples they're trading at, and using these assumptions, which we're on track for a fifty X a hash by June thirtieth, it does seem like Bitcoin is going to go way higher than ninety five thousand. Using these assumptions, that seems like a pretty sandbagged So that's why I named this live mispricing because I think we could do really well here. Now, I'm not saying that this is something that you necessarily need to back up to truck on. We have a position. It's a full position. We've already made a bunch of money on this stock and we've taken profits a number of times. And maybe the next time around, we'll see. I'm really waiting for it to do something like what CoreWeave has, where they have an agreement with Microsoft that provides most of their revenue. They're backed by NVIDIA. If they can get one of those big... hyperscalers on board with what they're doing and they'll need it in order to finish some of their locations, then this thing could go way higher. But we keep hearing about negotiations. The CEO mentioned negotiations in the earnings call that I was listening to before this live. he was talking about ongoing negotiations multiple uh with multiple parties so we'll see if this actually crosses the finish line if it does obviously that would be a catalyst um all right so we the uh iron cloud proven AI infrastructure, seventy-five million NVIDIA GPU cluster. They started in twenty-twenty-three. Now they've scaled it to close to nineteen-hundred H-one-hundreds and H-two-hundreds, which is really nothing. It's very small in scale compared to what's being used right now. GPUs installed at Iron's fifty-megawatt Prince George data center. This is important. So they had a seamless transition from the ASIC miners to the GPUs. And this is what they expect on a larger scale for their business, or at least new capacity will be dedicated towards GPUs. And there was minimal capex. So If you're worried about dilution, hopefully that's in check. This is always something that's top of mind when you're investing in Bitcoin miners, because it is very capital intensive. They did mention on the earnings call multiple times that they were basically going to think about dilution last, which is always reassuring. And there is some alignment of interest here because there is a healthy amount of insider ownership for this company. And something, I mean, if I can find it, but something actually very big is that in about thirty to sixty days, Iris Energy is going to be. a U.S. domestic issuer, which is as a company. And it's going to be classified as such. And therefore, a lot of ETFs that can't and a lot of funds that can't invest in non-U.S. issuers are going to be able to invest in Iris Energy. So that could be big catalyst for this stock so again here I'm seeing you know the near term as being inshallah very bright and so they mentioned here some highlights about their high performance computing business again thirty three percent revenue growth quarter over quarter ninety seven percent hardware profit margin that's really where That's really the reason for the switch to this different business line. And it makes all the sense in the world. I think AI infrastructure is going to be in really hot demand for the foreseeable future. And so I think it makes sense for IOS Energy to go into this business that has much higher profit margins than Bitcoin mining does. All right, so here they're laying the case for why AI infrastructure demand is increasing. They think it's going to forecast for global AI users, it's going to three X in five years, forecast for global AI data center demand, three point five X in five years. So that's a good business to be in. They have large scale sites and emerging AI hubs. I would note Texas being at the center of AI activity in the United States. And so their location is a very fortunate one. And they did mention there is a scarcity of liquid cooled AI data centers. That's something that's kind of a feather that they'd like to have. advertise that's in their hat, very few other providers of liquid cooling. And that's what they're going to have in their Horizon One. And it's going to be catered to liquid cool, NVIDIA, Blackwell, and the versions that come beyond that. And so they have really promising infrastructure in place to start printing money from this AI data center demand. And I did want to point out sort of, I think the most interesting as an investor, the most interesting slide was the following. So Up to two hundred and fifty million expected net funding requirement during twenty twenty five for expansion to fifty X. Keep in mind, they are generating cash and they're also sitting on around one hundred and eighty million in cash. So that should cover expansion to fifty X a hash completion of Horizon one sweet water substation development work. sorry combination of balance sheet uh it's a hundred sixty million cash as of april thirtieth and cash flows from bitcoin mining and ai cloud services support near-term growth capex so that's good again if you're worried about dilution so here they have the assumption for ninety five thousand uh bitcoin price uh six hundred and sixteen million is their EBITDA assumption. Now, assuming the network increases in difficulty, and let's say we have a hundred and fifty thousand average price for Bitcoin, then you're looking at EBITDA of close to a billion dollars. Again, this is a company that is trading at one point seven eight billion. So I think there's some margin here, margin of safety here in terms of the share price, the market cap really, and what it's being valued at right now. Again, the market seems to like the update. At least it is positive after hours. I do think that this is something that could perform well here, especially with the catalyst of a hyperscaler inking a deal with iris energy then kind of have yeah the the tesla uh tesla-like awakening that I suspect wherein you know people start to realize oh this isn't this type of company it's some other more profitable type of company in the case of tesla this is not an automobile manufacturer this is a ai and robotics with a lot healthier profit margin And in the case of Iris Energy, people are going to start looking at it as more than just a Bitcoin miner. This is something that has the attributes of something like a core. we should be pricing it differently with different multiples, more generous multiples, because its profit margin is better. So with that being said, let's go to questions. My presentation, I guess, was not as polished as perhaps though if I had you know more time to prepare but I just wanted to get to you guys the my instant reaction to their earnings so you know what I think because I've spoken about this stock many times on this channel before All right. We're not going through our list of watch list companies right now. But salam to you, Mohammed. Salam, Rashad. Nice to see you. BTC Miners. Different money, but we like it. Salam, Zuhair. Nice to see you. Salam, Pakhtun. Nice to see you. Are we in a bull market? Yeah, I do think so. I watched my live yesterday. I kind of go over why I think that is. Yeah, I like the live, guys. Really appreciate it. Thanks, Rashad. Salam, hafiz, nice to see you. I'm definitely won't tell you what you should invest in. This is just my opinions and you can do with them what you want. So I'm brother. The transition to data centers requires intensive capital core. We've just borrowed one point five billion on top of the eight billion already gave any thoughts if iron will need. I'm assuming you're going to ask. If they're going to have to follow the same path. Now, I don't know. I think that what it definitely needs, and certainly the CEO alluded to this, was a partner. And so it's possible that they have some arrangement where, you know, the partner, the hyperscaler provides, you know, a lot of the financing that they need. And so we'll see how that shapes up. I think that once there is a partner, and a customer that can really take advantage of what Iris Energy has set up right now in terms of assets, land, and energization, then there's going to be a lot less uncertainty regarding this stock. And it's going to become clear for investors what the path forward will be. And at which time I think the mispricing will solve itself. Right now, I do see that we are on that path. I wouldn't be surprised if we got an announcement. In the near future, nevertheless, even without the AI-HPC partnership, I think that we are going to witness a really healthy appreciation of BTC's price and therefore their fifty exahash is going to be printing money for this company, you know, for the foreseeable future. And so that's really the advantage that IOS Energy has, does have this know multiple potential catalysts on the horizon for it which should work well for investors inshallah if you like this live make sure to leave a like become a pif member to follow our moves trade for trade if you aren't a pif member already love you all take care peace be upon you all