A leaked Bitmain pre-IPO document on Twitter suggests the China-based chip design and cryptocurrency mining company is running at a loss, despite the substantial profits posted in 2017.
Bitmain’s alleged financial downswing is due to the company spending a large portion of their operating cash flow on Bitcoin Cash (BCH). That investment is believed to have accumulated a market loss of US$299.2 million since December’s all-time highs.
The leaked Twitter report also suggests that the mining giant has seen a sharp decline in revenue share from its own mining operations since 2016. This, however, may just be a strategic shift in focus.
Further underlying problems point towards the company’s cash flow and balance sheets. Issues appear to stem from ASIC overproduction, a large payment to Taiwan Semiconductor Manufacturing Company (TSMC), and tactics that resulted in losses incurred by the sale of its S9 and L3 machines.
The leak has come in light of the company’s plans to submit IPO application documents to the Hong Kong Stock Exchange.
Bitmain’s pre-IPO round was successful in raising a substantial sum. Recent funding rounds put the company’s valuation in the region of $14 billion. Plus, several billion more is expected to be raised during the planned IPO stage. Following the IPO, Bitmain could potentially be worth over US$20 billion.
Despite this promising outlook, the Twitter leak translated by BitMex could spark fear among investors. It is likely they will be looking at just how Bitmain plans to allocate investment capital in the future. Nonetheless, it is highly unlikely that the report will affect Bitmain’s IPO launch in any quantifiable manner.
Bitmain’s Current Operations
For those who are unaware, Bitmain is currently one of the leading ASIC chip design and cryptocurrency mining companies today. Even though it appears that its in-house mining operations have seen a sharp decline in overall revenue contributions since 2016.
Meanwhile, the company is still a dominant force in the ASIC design market, which is the company’s primary driver of sales. In 2017, Bitmain-manufactured ASICs are said to have a stronghold on Bitcoin’s market sector, with a 77% market share. Bitmain reportedly holds an 85% of all cryptocurrency mining operations in its palm. It is reasonable to assume similar figures will be reported over 2018.
Bitmain Pre-IPO Report Reveals Potential Losses
According to data provided in the leaked report, loss-making could be responsible for Bitmain’s 2018 revenue decline. The implied cost per each S9 ASIC shows a possible 11.6% negative profit margin, not the most promising sign to say the least. Also, the figures show a 100% negative profit for their L3 product. That being said, these calculations do not take into account that production costs may have since been reduced.
There are also two further key areas from the operational cash flow and balance sheet to take into account:
- Overproduction is evident from its huge inventory balance. This equates to around US$1.2, which is more than 50% of the company’s peak annual sales
- A large payment of USD$866 to TSMC weakened the company’s working capital
Losses Incurred By Cryptocurrency Portfolio – Particularly Bitcoin Cash
Other areas where the company has likely incurred losses include its investments into crypto assets, which amassed to a value of $1.2 billion U.S. in March 2018.
That portfolio shows a holding of over one million Bitcoin Cash. This amounts to 69% of its operating cash. Figures show that in 2017 that very holding was worth US$887.5 million. Using 2018’s current valuation, the same portfolio is estimated to be worth US$588.3 million today – which means a loss of $299.2 million was made.
948% Growth in Equipment Sales Overshadows Mining Revenues
An interesting revelation that the leaked pre-IPO document allegedly shows is that the percentage of Bitmain’s revenue contribution from mining has begun to decline. Mining had made up 18% of the company’s own revenue in 2016 but has since fallen to 4%.
Since Bitmain is well-known for its mining operation, at first glance this may look worrying to investors. However, in 2017 the company’s revenue actually rose by 250%, due to a 948% growth in equipment sales.
The reduction in the percentage of mining revenue could also be a strategic move enacted by Bitmain to lessen its reliance on this sector, as profit margins lessen and competition increases. Instead, Bitmain could be focusing its efforts further scale up the chain.
For the time being, there is no evidence proving the leaked document is real. The figures do suggest that Bitmain has seen investment issues and cash flow problems across the board. However, the company is still a market leader and has a looming IPO. The risks taken may be because Bitmain knows that once the IPO is in place, the company will have a large existing portfolio and a much larger pool for investment.