A rapidly improving business is what most investors will see when they look at Canaan (NASDAQ:CAN) and its stock. Investors who dive into its Q1 earnings report will find lots of information indicating the Bitcoin (CCC:BTC-USD) mining machine manufacturer is on an upward trajectory.
I believe that’s generally how investors should look at CAN stock. However, just because Canaan possesses improving fundamentals that doesn’t mean its stock price will certainly rise.
Clearly the cooling of Bitcoin’s price over the last month will factor into the company’s immediate and future prospects. Nevertheless, Canaan remains interesting as a true picks and shovels play in Bitcoin and cryptocurrency mining.
Unless you’re a trader, it likely makes sense to consider the financial fundamentals of a given company as the first step in potentially purchasing Canaan stock.
As I mentioned, Canaan appears to be doing well from that perspective. Canaan’s recent earnings report is provided as text and not as a spreadsheet so I’ll reiterate the pertinent points that I took from it.
Firstly, I’m a big proponent of considering revenues first. There’s a good reason that revenues are listed as the top line. That reason is that they drive everything else. Fortunately for Canaan revenues recently increased a lot.
In Q1 of 2021 it reported $61.5 million in revenues, up roughly 6X from the period a year prior, and more than 10X from the prior quarter. Importantly, Canaan’s increasing revenues were not associated with net losses. It recorded profits of $29.6 million from those $61.5 million of revenues in Q1. In previous quarters it was close to $1 million in profits on an adjusted basis accounting for its Renminbi exchange rate as a Chinese company.
It’s clear though that the company is growing very quickly. That growth will obviously interest many, yet at the same time its correlation to Bitcoin will provide reason for pause.
Bitcoin and Miner Manufacturing
Everyone is well aware of the fall in Bitcoin prices over the past month. Between May 8, when prices were at $58,788, and June 12, when prices were at $35,655, Bitcoin has dropped 40%.
So, although we’ve seen that Canaan rapidly improved during Q1, we really have no way of accounting for what has happened over the last month. It makes sense to assume that Canaan will have seen decreased demand for its mining computers during the period.
So even assuming that Bitcoin rebounds over the coming months Canaan will ostensibly provide weaker numbers in its Q2 earnings when they come out. It’ll be easy to explain the drop, but that doesn’t mean investors won’t punish CAN stock by selling.
Further, Canaan’s stock price isn’t strongly correlated with that of Bitcoin. It basically went parabolic rising from $6 to $34 between February and March. It has slid down to $8 steadily over the past 3 months. This indicates that its price woes aren’t correlated to Bitcoin which has fallen only in the last month.
Other InvestorPlace writers suggest that Canaan’s mining rigs are not as powerful as others on the market. That would make more sense than bitcoin’s price woes as a reason for CAN stock’s steady price decline over the past 3 months.
Although Canaan clearly has done well from a financial and fundamental perspective, it hasn’t translated to increasing share prices.
My gut feeling is that those Bitcoin mining manufacturers with more competitive specs are simply more attractive. Perhaps Canaan’s spike in revenues was a product of it simply being a known name in the space and not a truly strong competitor. In any case, I don’t think it makes sense to establish a position now.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.