Bitcoin (BTC-USD) and nearly every Bitcoin-related stock have been on a ride to the moon over the last four of five months. Notably missing from this rocket ride is Canaan Inc. (NASDAQ:CAN). I covered CAN for Seeking Alpha back in October shortly before the US stock market started a nearly 5-month long rally that has had virtually no meaningful pullback whatsoever.
Yet, even with both Bitcoin and stocks rising, CAN has actually gone down since my October article. In this update, we’ll look at the company’s performance since October, analyze the possible impact of the upcoming Bitcoin block reward halving on CAN, and assess whether it might finally be time to “buy the Bitcoin shovels” company.
Q4 Performance
| Revenue | Q4-22 | Q3-23 | Q4-23 | QoQ | YoY |
|---|---|---|---|---|---|
| Products | $47,546 | $29,937 | $44,907 | 50.0% | -5.6% |
| Mining | $10,735 | $3,264 | $3,708 | 13.6% | -65.5% |
| Other | $33 | $118 | $458 | 288.1% | 1287.9% |
| Total | $58,314 | $33,319 | $49,073 | 47.3% | -15.8% |
Source: Canaan, Form 6-K, USD in thousands
In Q4-23, Canaan reported $49 million in total revenue, which was nearly a $15 million beat versus expectations. Quarterly revenue was up 47% over Q3 but down nearly 16% against the prior year period. Revenue from mining was the biggest laggard and product sales were only down 5.6% from Q4-22. For the full year, the company did $211.5 million in total revenue against $452 million in costs of revenue. $190 million of this full year cost of revenue was attributable to inventory and prepayment write-downs.
I think the chart below really says it all; costs were up, sales were down, and gross profit absolutely nerfed from positive for three consecutive years to deeply negative:
Is the worst over? Frankly, it’s difficult for me to make that case judging purely from the company’s balance sheet situation.
Balance Sheet
Canaan is still dealing with some of the same issues that plagued the company when I last covered it. Even though Canaan has sold machines, there is still quite a bit of inventory remaining and product markdowns are still evident judging by Canaan’s online store.
Contributing to the inventory glut is that Canaan still has older model machines that aren’t as efficient for Bitcoin mining as some of the newer ASICs. The company’s Avalon 14 machines are certainly competitive with offerings from peers like Bitmain and MicroBT, but the company is still sitting on Avalon 12 hardware. These rigs are far less profitable than newer machines and will be even less so in a month following the halving.
The other side of the balance sheet admittedly isn’t awful. Canaan has just $145 million in total liabilities. The company could cover all financial obligations with just the $96.2 million in cash and the 909 Bitcoin on the balance sheet. The latter of which has a market value of about $60 million as of article submission.
Machine Prices
Canaan’s revenue beat last quarter was no doubt due to an unexpected increase in the price of ASICs that started in November. Chinese crypto reporter Colin Wu shared via X in late December that machine prices had indeed started to rise and specifically mentioned Canaan as a beneficiary:
As Bitcoin exceeded 44,000, the stock price of Bitcoin mining machine manufacturers Canaan Technology and Ebang rose as much as 32% and 34%.
More recently, we’ve seen those machine price gains slow down or even start moving the opposite direction despite Bitcoin ripping to new all-time highs in March:
ASIC Price Trend 1yr (HashRateIndex)
This is admittedly an assumption on my part, but I suspect the move up in ASIC prices back November and December was a reaction to Bitcoin network transaction fees surging:
Bitcoin transaction fee % (HashRateIndex)
I have covered the transaction fee angle for Bitcoin miners multiple times. Should fees remain high, it would be a very positive development for miners as the block reward halving quickly approaches. However, we haven’t seen that late 2023 trend in transaction fees continue in February or March. Thus, the rising Bitcoin prices over the last two months haven’t meaningfully driven prices in even the lower J/TH ASIC machines.
Canaan is guiding for $103 million in revenue for the first half of this year. $33 million of which is expected in the current quarter. This seems to indicate leadership is expecting a surge in demand for machines following the halving as miners scramble to scale EH/s.
The Last Halving
There is some merit in the assumption that miners will look to buy more machines following the halving in April. The previous Bitcoin halving was May 11th, 2020. In the chart below, I’m showing the price of CAN against both the price of Bitcoin and Bitcoin’s global hash rate between 2020 and 2021. There are a couple things that I notice:
First, CAN stock moved in line with global hash rate up until the point of the halving. In the chart below, we can see this isolated down to the first half of 2020:
After the mid-May halving, CAN didn’t do much even as global hash rate moved higher. We can see from the chart below that CAN’s 2nd half of the year surge didn’t start until Bitcoin made a new 52 week high in the fourth quarter of the year:
Looking at the longer view, CAN’s biggest stock price spike didn’t come until early 2021. Interestingly, the stock gains came almost a full year before Canaan’s quarterly revenue peaked:
If we use this as a guide for what to expect following the next halving, CAN stock may get another post halving spike as miners look to scale to replace lost revenue from the halving. However, I’m not totally convinced that this time will be the same and I’ll detail why in my closing summary.
Risks
Canaan still appears to have a cash burn problem. The company averaged a quarterly operating net loss of $100 million per quarter in the second half of 2023. Given that, the company will likely need to continue raising capital through its $148 million ATM with B. Riley Securities (RILY).
Canaan raised $25 million with this ATM in December and an additional $50 million from the second tranche in January. By my count, that leaves $73 million remaining on the ATM which is still a bit of potential ADS dilution with a market cap of $375 million.
Summary
I still can’t personally justify taking a swing at CAN stock. What I think complicates the halving setup for Canaan this time around is the fact that Bitcoin is already behaving very differently from what we’ve seen historically. The more the spot ETFs pull forward the gains in BTC for this cycle, the less time miners have to scale exahash for any post-halving rally. This is potentially an issue for Canaan because if there isn’t much meat left on the bone for Bitcoin speculators in the second half of 2024, the company may not benefit from post-halving FOMO rig purchases as the yield on even less efficient machines would look a lot better economically.
Obviously, this is mostly speculation on my part and I think the real tell will be how leadership guides the second half of the year after Q2 earnings. In any case, the cash burn from the company is worrisome to me. You could certainly take a flier on CAN stock at tangible book, but I wouldn’t pay much more for it due to the potential opportunity cost of simply longing the spot ETFs instead.
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