There is a debate in the investing landscape around the artificial intelligence (AI) bubble, whereby some believe the significant rallies in AI stocks will vanish. This fear stems from the dot.com bubble of 2000. But AI is not going anywhere. It is real, and it is happening. We are in the AI supercycle as computing power becomes the next utility. Several Canadian data centre companies, including Hive Digital Technologies (TSXV:HIVE), are tapping this AI supercycle.
In an interview with Motley Fool Canada, Frank Holmes, Executive Chairman of Hive Digital Technologies, discussed his plans to capture the dual supercycle of Bitcoin Mining and AI Data Centres (DC).
The AI data centre supercycle
Data centre companies are providing infrastructure for enterprise networks and cloud computing. But the AI data centre opportunity is different. Tier-3 AI data centres cost three times more than a Tier-1 Bitcoin mining data centre. AI data centres need 40% more cooling capacity and a longer time to become operational.
Going into the very basics, Frank explained that a Tier-1 bitcoin mining DC needs an application-specific integrated circuit (ASIC), which costs $2,000 per piece and six hours to unwrap and run. But an AI DC needs a $40,000 Nvidia graphics processing unit (GPU) that takes six weeks to unwrap and run. The biggest capital expenditure is the GPU, and the highest operating cost is electricity.
Given the speed at which AI is growing, the need for AI compute will only increase. Building an AI DC from scratch takes anywhere between three and five years. Hive is looking to reduce this cost by converting Tier-1 DCs to Tier-3. It has chosen Paraguay to leverage its cheap electricity cost and a flat tax rate of 10%. Here, it is using the biggest dam in the Western Hemisphere to generate hydropower to run its AI DCs.
Hive boasts an 80% operating margin on HPC computing after incorporating energy costs. The company is looking to tap the AI DC supercycle, where it will have to compete with companies Equinix and Applied Digital, which already have a portfolio of purpose-built DCs for enterprise networking and are building AI DCs. Hive plans to compete with the giants by building DCs faster and cheaper.
Valuing Hive purely on the AI data centre supercycle
At present, Hive BUZZ platform accounts for only 6% of its revenue. It aims to convert this into a flywheel model and is looking for AI DC contracts from governments, defence, and hyperscalers. A single order win from a hyperscaler could set the flywheel in motion and generate significant operating profit.
Frank is looking to replicate crypto miner Crusoe’s model of building an AI DC in areas where there is surplus electricity. Crusoe is venturing into the purpose-built AI “neocloud,” building a 1.2-gigawatt Stargate data centre for OpenAI in Texas. Crusoe doesn’t trade on the stock exchange, but its share price surged 360% in the private market in the last two years. If Hive lands a hyperscaler deal, its share price could also triple and touch $10.
The Bitcoin mining supercycle
Although the AI DC supercycle has potential, it remains vulnerable to economic cycles. Demand for AI capacity will fluctuate. However, Hive will continue to mine Bitcoin, and Frank expects BTC value to keep growing like that of physical gold.
Hence, instead of selling BTC to fund the AI data centres, Hive is pledging BTC to fund its AI DC. When the value of BTC rises, one BTC will fetch more paper currency, which is a depreciating asset. Hive’s BTC inventory will help it enjoy the future Bitcoin supercycle as BTC becomes the digital gold in the AI world.
Is Hive a value pick for the AI and Bitcoin rally?
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a key value driver in the AI DC space. If we compare other Bitcoin miners and AI DC companies, Bitfarms and Applied Digital, they are trading at an Enterprise Value-to-EBITDA of 31.8 times and -7.4 times, respectively. Hive is trading at 4.7 times.
Hive is expanding in Latin America, tapping the capital market by listing on the Colombian Stock Exchange. This complements its listings in Canada, Germany, and on Nasdaq. This small-cap stock has what it takes to become a mid-cap stock. Although trading volumes are lower and multiple listings are diluting equity value, the exponential growth cycles of AI DC and Bitcoin mining could make it the next millionaire-maker.
