Canaan (NASDAQ:CAN) is a fast-growing Chinese maker of ASIC (application-specific integrated circuit) cryptocurrency mining machines. Based on Canaan’s Q4 2020 earnings release from April, CAN stock looks cheap right now.
Long term, CAN stock could be worth as much as $18.77. That’s 46% higher than its current price of $12.83.
The reason is simple. The company provided guidance that suggests growth into the future.
Canaan indicated at the end of the release that its 2021 revenue will be “substantially improved.” This comes after 2020 revenue fell by 78.9% to $62.88 million.
Now the company predicts that its Q1 sales of ASIC miners will be “not less than RMB 400 million.” That works out to $61.8 million for Q1 alone, equal to nearly all sales in 2020.
Moreover, Canaan, which primarily sells its ASIC miners to Chinese miners of Bitcoin (CCC:BTC-USD), said this reflects its “current and preliminary views on the market and operational condition.” This implies that the sales gains in Q1 could continue through the year, giving it an annual revenue run-rate of $247 million (i.e., $61.8 million x 4).
This represents potential growth of almost 300% in revenue for 2021. But CAN stock doesn’t reflect this potential windfall right now.
Canaan Stock Valuation
For example, CAN stock has a market capitalization of $2.03 billion at $12.83 per share. This puts it on a price-to-sales (P/S) multiple of 8.21 times. That seems too low for a company benefiting from a huge surge in demand.
Plus, Canaan just announced on April 29 that it was able to raise $170 million at $12.60 per share (a net amount of $159 million). This is on top of the $59.97 million in cash it had at the end of 2020, according to page F-3 of its recent SEC 20-F annual report filing.
This means that Canaan now has $219 million in cash in the bank. That implies that, after deducting cash, its net market cap stands at $1.821 billion. This is just 7.37 times its $247 million in forecast sales for this year.
Given Bitcoin’s anticipated growth over the next several years, I suspect Canaan will show consistent growth in demand for its Avalon brand ASIC miners, which account for the majority of its sales. The company is also branching out into producing artificial intelligence (AI) specific chips and ICs.
As a result, CAN stock should trade at least 10 times revenue, or $2.47 billion. In addition, after adding back the $219 million in cash, the net market value is at least $2.689 billion. This is 32% above today’s $2.03 billion stock market value. This gives CAN stock a target price of $16.99 per share.
What To Do With CAN Stock
So far no other Wall Street analysts have put out a target price for CAN stock. However, Bitcoin mining stocks like Riot Blockchain (NASDAQ:RIOT) and Marathon Digitial (NASDAQ:MARA) have done extremely well.
For example, Riot stock is up 147% this year, and MARA stock is up 252%. But CAN stock is up just 110%. And CAN stock has fallen further than both of these Bitcoin mining stock peers in the past month. I suspect all three are due to rebound through the summer. But CAN stock is likely to grow more given how far it has fallen, as well as its recovery forecasts.
For example, my price target for Canaan stock is based on a 10 times forward P/S multiple valuation. But Riot stock trades at a 17 times P/S ratio and MARA stock at 12.7 times forward sales.
In other words, there is plenty of room for CAN stock to be revalued higher than $16.99 at 10 times sales. After all, there is the old maxim about how it is more profitable to sell picks and shovels rather than mining for gold.
On the date of publication, Mark R. Hake held a long position in Marathon Digital (MARA).
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.