AI-focused Bitcoin miners are outperforming rivals amid 'significant upside' potential for the industry, Bernstein says

AI-focused Bitcoin miners such as Core Scientific, IREN and Terawulf are outperforming their “pure play” rivals in terms of stock price due to stronger conviction in the data center thesis amid choppy bitcoin price action, according to analysts at research and brokerage firm Bernstein.

AI-focused miners have outperformed through stronger investor confidence in their business model diversification, better valuation multiples, more predictable revenue streams and greater flexibility in navigating the often volatile bitcoin market, Gautam Chhugani, Mahika Sapra and Sanskar Chindalia wrote in a note to clients on Monday.

While their hash rate growth may generally be slower than that of pure-play Bitcoin miners, AI-focused operators are expanding their data center infrastructure in parallel, which provides additional opportunities in the rapidly growing AI sector, the analysts said.

However, IREN is an exception as the fastest-growing miner by hash rate with a fourfold increase year-over-year, according to Bernstein.

Large public Bitcoin mining consolidators like Marathon, Riot Platforms and CleanSpark also hold substantial amounts of bitcoin on their balance sheets, selling a smaller percentage of their mined coins this year compared to 2023 and retaining 100% of their August production, the analysts noted. “This shift indicates that large miners are willing to raise capital or accept dilution to invest in capex and expand their market share in Bitcoin mining, instead of liquidating their bitcoin holdings,” Chhugani, Sapra and Chindalia said, adding, “Currently, they view AI as a distraction and are not pivoting their capacity towards the same.”

In contrast, AI data center-focused miners do not hold bitcoin on their balance sheets, often due to internal policies or debt covenants, according to Bernstein, and regularly sell 100% of their production to fund operations. “These miners are unwilling to take a price view on bitcoin, do not prefer bitcoin as a treasury asset and see themselves as data center operators,” the analysts added.

'Significant upside' potential for public Bitcoin miners

While the stock price of AI-focused firms may be currently outperforming, Bernstein expects pure-play public Bitcoin miners to bottom around current price levels and gain from an acceleration of the bitcoin cycle once U.S. election uncertainty is resolved.

“Bitcoin miners have significant upside from the power portfolios they control. They operate ~6GW of power capacity, globally. Bitcoin miners, by focusing on an active ‘power’ strategy and pushing the frontiers of power efficiency, can make a stronger case for valuation re-rating (~90% discount vs. traditional data centers),” Chhugani, Sapra and Chindalia wrote. “There is upside from investors valuing mining assets as efficient ‘power shells’ with data center capabilities, with further upside from the bitcoin price cycle.”

Bernstein rates Riot stock as outperform, with a target of $22 compared to Tuesday’s closing price of $7.10, CleanSpark as outperform with a target of $30 vs. $9.15 and Marathon as market-perform with a target of $23 vs. $15.87.

In terms of AI-focused Bitcoin miners, Bernstein rates Core Scientific as outperform with a target of $17 vs. $11.48 and IREN as outperform, targeting $26 compared to yesterday’s $8.03 closing price.

“Bitcoin miners can make a case for better stewards of power resources, and choose to optimise yield on their power portfolio more strategically between AI and bitcoin cycles, driving valuations higher,” the analysts concluded.

Gautam Chhugani maintains long positions in various cryptocurrencies. Affiliates of Bernstein act as market makers or liquidity providers in the debt securities of Riot Platforms.