TeraWulf is an undervalued stock, says ATB Capital

The promise of AI seems limitless, at least if the breathless headlines published every day in the tech sector are to be believed.

But the reality is often much more mundane, and ATB Capital analyst Martin Toner has found a way for investors to take advantage of this juxtaposition.

In a research update to clients on January 5th, Toner initiated coverage on TeraWulf (TeraWulf Stock Price, Chart, News, Analysts, Finance NASDAQ:WULF).

Founded in 2021, WULF is a digital asset company operating a decommissioned coal-fired generation
facility in New York State called Lake Mariner that has the potential to accommodate 750 MW of capacity.

The analyst says that instead of focusing on mining itself, WULF has the ability to solve the AI ​​power bottleneck.

“Evidence suggests that access to power is a bottleneck in the AI ​​investment cycle. Hyperscalers are building GW-scale data centers, and we believe there are dozens of other potential customers for HPC/AI data centers,” he wrote.

The analyst says WULF deserves a multiple higher than that of a pure miner.

“Data Center REITS trade at a premium to BTC miners (25x EV/EBITDA vs 5x EVEBITDA) and we believe the HPC business doubles EBITDA per MW. We estimate that the increase from being a pure BTC miner to an HPC data center is potentially a 10x improvement for shareholders, we think that simple math should get investors’ attention,” the analyst added.

Toner has initiated coverage of WULF with an “Outperform” rating and a $10.50 price target, implying a 68.8% return at the time of publication.

The analyst believes the company will post adjusted EBITDA of $60.2 million on revenue of $140.5 million in fiscal 2024. He expects those numbers to improve to adjusted EBITDA of $129.2 million in a top line of $298.9 million in fiscal 2025.

“Our price target is based on a blended average of a sum-of-the-parts (SOTP) and multiple-based approach and a DCF. We value WULF’s HPC assets using a multiple of 22x 2026 EV/EBITDA (based on data center REIT comps) and our discounted cash flow (DCF), using a weighted average cost of capital (WACC) of 9.7% and a terminal growth rate of 3.5 Our DCF model implies a terminal EV/EBITDA multiple of 13x. Our discounted terminal value of $3.9B represents 91% of our total estimated EV of $4.3B. Our valuation implies an EV/2026 EBITDA of 25.7x,” concluded Toner.