Tech Chat – November 2020
Squashing the Sombrero
We have seen Boris on TV telling us we need to “flatten the hump” and “squash the sombrero”. The language gets ever more flowery but the basic concept is to sensibly avoid the sharp ups and downs of coronavirus cases; a rollercoaster of ups and lockdowns. It reminded me of the Winklevoss twins. Those who have seen The Social Network movie will remember the brothers who recruited Mark Zuckerberg when they were setting up their original university network, HarvardConnection, and believed he stole their idea to set up Facebook. They sued for a cool $60m and it made a great movie. What people might not realise is what they went on to do with their winnings: they jumped on a Bitcoin rollercoaster, buying $11m of Bitcoin in 2013 they briefly became billionaires in 2017 as Bitcoin soared to a record high of $20,000 before plummeting to $3,000 in 2019. And now they are billionaires again as Bitcoin has shot back up to $17,000 on fears that COVID will cause massive central bank easing and fiscal stimulus debasing currencies. Billionaires every other year; it must be quite a ride.
That kind of rollercoaster excitement isn’t for everyone and luckily there is a less volatile way for slightly more risk averse investors to ride the Bitcoin express. This week we initiated on Argo Blockchain which operates a highly efficient cryptocurrency mining platform in Canada and the US, where it uses some 16,000 specialised computers to mine Bitcoin (c.90% of revenue) and Zcash. It differentiates itself on its access to abundant, low cost power in these locations, and the proprietary technology it has developed to optimise its operations. Some might find the business complex but there is no arguing with proven success and Argo has already achieved a cash payback of 1.3x on its 2019 investment in machines. We expect Argo to deliver even stronger growth in FY21, with 34% organic revenue growth to £25.3m, EBITDA increasing to £11.1m from £5.6m, and EFCF of £7m.
We feel this is a safer play than direct bitcoin investment, smoothing out the volatility of the rollercoaster – or flattening the hump if you are Boris. Argo’s performance is determined not just by the Bitcoin price, but also the difficulty of mining Bitcoin, and it is its operational efficiency that will determine its success. In our upside case of 95p we show how Argo’s platform is strongly geared to the interaction between the difficulty of mining Bitcoin and Bitcoin’s price, while in our downside case we highlight that under highly adverse assumptions Argo would still continue to generate EFCF, and deliver FY23 net cash of £11m, or 4p per share. At 11p today, it’s trading on 8x FY21 EV/EBIT, and 18% FY21 EFCF yield.
The Winklevoss twins have been riding a rollercoaster of not knowing whether they are billionaires or just plain-old millionaires. Neither is of course a bad position but that sort of ride has too much excitement and distraction. In fact the original idea of a rollercoaster was a “devil-distractor”. The father of the American rollercoaster, LaMarcus Thompson, developed the idea in the 1880s as a distraction to save America from “Satan’s temptations” in saloons and brothels, which were booming at the time. I wonder if he were still around he could invent something to distract from the devil’s new toy, Facebook?
Happy Friday