Exploring Core Scientific's ($CORZ) HPC Datacenter Opportunity
Exploring Core Scientific's ($CORZ) HPC Datacenter Opportunity
Assessing the Merits and Risks of a Potentially Underappreciated Post-Reorg Equity
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This week’s post on Core Scientific, Inc. (“CORZ”) comes a bit late given market circumstances. This is a name that was recommended to me on Twitter late last year, and it’s a company I loosely followed while it was in bankruptcy. Nonetheless, the company has had a wild ride over the last 18 months, facing a near-death experience and now potentially emerging as a key player in the AI infrastructure gold rush (if it still exists!). While I missed the initial rally (+240% YTD through the peak), given the recent drawdown over the last several weeks (-30%), I figured it warranted another look. This week’s write-up will be more equity-focused vs. credit.
Situation Overview:
Headquartered in Austin, Texas, Core Scientific, Inc. (“CORZ”) is a publicly traded Bitcoin mining and high-performance computing (“HPC”) infrastructure provider. The company operates owned and co-located ASIC servers across 8 data centers in 6 states in North America, representing 1.2 gigawatts (“GW”) of power capacity, with 760 MW currently operational. As of June 30, 2024, the company operated an owned fleet of 164,000 bitcoin miners producing 19.4 exahash per second (“EH/s”) of hash rate and hosted an additional 42,000 client-owned machines. The company does not take balance sheet risk and sells bitcoin rewards for USD.
Crypto Winter and Bankruptcy
Like many of its peers, CORZ got caught with its pants down during the 2022 crypto meltdown. The combination of plummeting Bitcoin prices, rising energy costs, and the company’s leveraged balance sheet created an unsustainable situation. In December 2022, the company filed for Chapter 11 bankruptcy protection in the Southern District of Texas, joining a wave of cryptocurrency-related insolvencies.
Contrary to many observers’ expectations, CORZ successfully navigated the bankruptcy process and emerged as a reorganized entity in January 2024. The company slashed $400 million of debt through a debt-to-equity conversion, issued new paper (secured notes and converts), and emerged with a much cleaner balance sheet.
Post-Bankruptcy Resurrection
Since emergence, CORZ has shown signs of life, benefiting from Bitcoin’s price recovery and its scaled operations. In 1Q’24, CORZ reported $179 million in revenue (+49% y/y) and $88 million in Adj. EBITDA (+118% y/y). Gross margins expanded to 43%, and the company ended the quarter with $98 million in cash.
While Bitcoin prices have recovered nicely from the lows of the “crypto winter,” profitability remains pressured by elevated global hashrate and the recent halving event in April 2024. As of May 2024, the Bitcoin hash price sat at ~$0.05, below the breakeven levels for many miners. CORZ enjoys a relatively low cost of power (~$0.043/kWh in 1Q’24) and has been proactively managing its fleet to optimize efficiency (25.78 J/TH as of April 2024), but the current mining economics remain challenging. A sustained improvement in profitability will likely require a combination of (i) stable to higher Bitcoin prices, (ii) slower hashrate growth, and (iii) further efficiency gains.