Undeniably, one of the top phenomena of last year centered on the dramatic surge of the cryptocurrency market late in the game. With the sharp sentiment pivot, several individual cryptos and sector-related enterprises flourished, except for Canaan (NASDAQ:CAN). Still, those who want a ticket on the blockchain bandwagon might consider this overlooked entity. Thanks to a key demographic catalyst for virtual currencies combined with its relatively undervalued profile, I am bullish on CAN stock.
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CAN Stock Brings a Higher-Risk, Higher-Reward Distinction
As stated above, a main point of attraction for CAN stock centers on its relatively undervalued profile compared to similar investments. Specifically, in the past 52 weeks, Canaan shares have slipped by roughly 9%. During the same period, crypto-driven infrastructure platform Riot Platforms (NASDAQ:RIOT) gained more than 200%. Obviously, that’s a drastic difference. So, the natural question is, why?
Fundamentally, much of the difference zeroes in on the varied business models. Per its website, Riot Platforms owns and operates a crypto mining facility. However, Canaan is a China-based computer hardware manufacturer. Essentially, it provides the equipment necessary for mining enterprises to conduct their operations. Unfortunately, this latter business model comes with higher risks.
When the crypto concept initially launched, the verification process undergirding blockchain transactions was known as Proof-of-Work (PoW). Long story short, crypto miners used sophisticated machinery to process complex algorithmic problems. Being the first to solve such problems netted a reward – the underlying cryptocurrency. Under PoW, those with the biggest and fastest rigs enjoyed a higher probability of securing said rewards.
However, PoW protocols are energy-intensive and thus inefficient. To remedy this and other problems, blockchain engineers introduced a Proof-of-Stake (PoS) protocol. Under this protocol, those parties with the greatest stake in the target blockchain network enjoyed the highest probability of earning rewards for transactional verifications.
As it relates to CAN stock, PoS protocols place less emphasis on mining equipment. Further, more blockchain networks are interested in converting to PoS or similar protocols. Therefore, Canaan struggled against its direct mining peers. Nevertheless, that might not be the end of the world.
For one thing, PoS is far less proven of a concept than PoW. Second, by rewarding stake over raw processing power, the underlying network becomes less democratic and more aristocratic as early adopters inherently command more influence. Such a framework defeats the purpose of the democratization principle of decentralized finance.
Demographics are the Key to the Crypto Surge
Despite the reinvigorated sentiment toward cryptos, investors have legitimate concerns. Mainly, if the present bullish conditions in the economy fade, it’s quite possible – even probable – that virtual currencies will fall significantly. It’s the modus operandi of the ecosystem. Nevertheless, this paradigm may shift favorably for the bulls due to the following demographic catalyst.
To no one’s surprise, crypto investors are young. According to one survey, nearly 94% of stakeholders of virtual currencies hail from the age range of 18 to 40. Basically, we’re talking about Generation Z and millennials. However, the so-called Zoomers (Gen Z) can really pick up where the millennials left off, ushering in a new investment standard.
Unlike millennials, Gen Z really has no recollection of the analog past. They were born into a world where entities like Amazon (NASDAQ:AMZN) sprouted alongside them. In other words, they are used to the concept of digital everything, meaning convenient everything.
If you want to stream a movie, boom! You can do so via on-demand entertainment. Thinking about making spaghetti for dinner? Why bother getting off the couch when you can have your groceries delivered right to your door?
And that’s basically the ethos behind the crypto space. Rather than having to play by the rules of the New York Stock Exchange, people can trade digital assets 24/7/365. As Zoomers get older and thus increase their purchasing power, more money may be directed toward virtual currencies than stocks.
How does that benefit CAN stock? Primarily, as crypto valuations rise, so too should demand for crypto-mining equipment, and while interest in PoS protocols may present a challenge, PoW might not go away due to the aforementioned early-adopter criticism.
Betting on the Broader Narrative
Though CAN stock seems attractive based on its “undervalued” performance relative to its peers, it’s difficult to quantify what that term actually means. For instance, valuations based on earnings represent a huge challenge because Canaan’s net income gyrates depending on the crypto cycle. Therefore, investors must rely on the broader narrative of demographic adoption rather than pure financial metrics.
That said, one objective positive for CAN stock is its balance sheet. Specifically, it carries a high cash-to-debt ratio of around 21x, which offers flexibility advantages, especially within the high-volatility crypto market.
Is Canaan Stock a Buy, According to Analysts?
Turning to Wall Street, CAN stock has a Moderate Buy consensus rating based on two Buys, zero Holds, and zero Sell ratings. The average CAN stock price target is $4.25, implying 86.4% upside potential.
The Takeaway: CAN Stock Offers an Underappreciated Opportunity
While Canaan underperformed its blockchain peers, the company presents a bounce-back opportunity. In particular, the Proof-of-Stake protocol pivot might be an exaggerated headwind. Further, the demographic catalyst as Gen Z rises in purchasing power may ultimately help move the needle for CAN stock.
