Following Bitcoin’s fourth halving in April 2024, crypto miners have been diversifying their operations by leveraging their High-Performance Computing (HPC) expertise to build and manage infrastructure for AI technologies as a service. The charge has been led by Core Scientific (CORZ). This North American digital asset mining company also offers blockchain infrastructure, software solutions, and services, with mining and hosting as its primary segments.
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However, DeepSeek, a Chinese startup, has launched an advanced artificial intelligence (AI) model, DeepSeek R1, causing market turbulence in various sectors, including technology, banking, and nuclear energy. DeepSeek R1 is an open-source AI platform that offers capabilities comparable to OpenAI’s ChatGPT. However, the industry is increasingly concerned about this AI model’s extremely low production cost, reportedly developed in just two months for only $6 million, compared to the billions typically spent by U.S. technology firms on AI models and data center infrastructure. This significant cost disparity has led to declines in stock values across the affected sectors as market participants reassess the economic viability of high-cost AI developments.
Core Scientific’s shares dropped roughly 30%. While it’s still too soon to know if the market’s reaction is warranted, this may prove to be a window of opportunity for investors.
Shifting to HPC Services
Core Scientific operates through two major segments: Mining and Hosting. It generates income by mining digital assets for its own account. At the same time, it provides hosting services for other large Bitcoin miners. These hosting services include a wide range of functions such as deployment, monitoring, troubleshooting, optimization, and maintenance of its customers’ digital asset mining equipment. Additionally, the company manages data center mining facilities.
I know What you Did Last Quarter
In the third quarter of 2024, total revenue reached $95.4 million, reflecting a decrease of $17.6 million compared to the same period in 2023. Revenue for this period mainly came from digital asset self-mining, digital asset-hosted mining, and HPC hosting revenues. A significant decline in self-mining gross profit was reported, primarily due to a 62% drop in Bitcoin mined. This was somewhat offset by a 117% increase in Bitcoin’s price and higher depreciation costs from newly deployed efficient miners.
Digital asset-hosted mining revenue achieved a gross margin of 29%, remaining stable from last year despite a shift to HPC hosting and lower power rates. HPC hosting, which began in the fiscal second quarter of 2024, reported a gross margin of 13%.
Operating expenses increased by $13.5 million in the third quarter of 2024 compared to the same period last year, driven by higher personnel and related costs, as well as HPC site startup expenses. The company reported a net loss of $455.3 million and an operating loss of $41.2 million. Adjusted EBITDA was $10.1 million, a decline of $17.6 million from the previous year’s third quarter.
Despite these losses, the company strengthened its balance sheet, closing the quarter with cash and cash equivalents totaling $253.0 million.
Potential Ample Upside
Despite the recent price drop, the stock has been on an upward trajectory, climbing over 225% in the past year. It trades in the upper half of its 52-week price range of $2.61 – $18.63.
Analysts following the company have been bullish on CORZ stock. For example, Craig-Hallum analyst George Sutton, a five-star analyst according to Tipranks’ ratings, recently initiated coverage on the stock with a Buy rating and $24 price target, noting the potential ample upside in the company’s pipeline.
Core Scientific is rated a Strong Buy overall, based on the recent recommendations of 14 analysts. The average price target for CORZ is $20.71, representing a potential upside of 83.60% from current levels.
CORZ in Summary
The crypto mining industry has recently experienced significant shifts, with miners diversifying into High-Performance Computing (HPC) to support AI technologies. However, the announcement of DeepSeek’s low-cost AI model has caused share prices to plummet. The market’s reaction may be premature and could represent an investment opportunity. Analysts maintain a bullish outlook, predicting considerable upside potential. With the recent dip acting as a potential entry point, Core Scientific could be an attractive investment option.
