This Company Won Big With Bitcoin and AI. Why It’s Now Favoring One Over the Other

In the ever-evolving world of technology and finance, few stories resonate as powerfully as that of Core Scientific, an Austin, Texas-based company that underwent a dramatic transformation from bankruptcy to stock market success in just one year. Core Scientific achieved this remarkable turnaround by strategically betting on two burgeoning technologies: Bitcoin mining and AI data centers. However, despite their impressive journey this year—where shares skyrocketed by a staggering 400%—executives have made it clear that their preference now leans heavily towards investing further in AI data centers.

From Troubled Beginnings to Triumph

At the beginning of 2024, Core Scientific was navigating the choppy waters of bankruptcy protection, burdened by excess debt from its public debut through the SPAC process in 2022, compounded by a plummeting Bitcoin price. However, on January 23, the company emerged from bankruptcy with a renewed outlook and $400 million less debt. This fresh start allowed Core Scientific to pivot from its initial focus on crypto mining, swiftly adapting to the burgeoning demand for electricity required to fuel AI data centers.

Why AI Data Centers Take the Lead

The chief operating officer, Matt Brown, left no room for ambiguity regarding the company’s direction. “We really just value long-term, stable cash flows and predictable returns,” he stated. In contrast to the highly volatile nature of Bitcoin—despite its surge of 116% this year—data centers emerged as a beacon of stability, with Core Scientific poised to rake in consistent profits by leasing space to companies selling cloud services to AI providers. With a robust setup of nine grid-connected warehouses across six states, Core Scientific possesses the critical asset of reliable power, facilitating their shift towards data center operations.

The Winning Deal: Coreweave

A pivotal moment for Core Scientific came when it inked a landmark deal with Coreweave, a rapidly growing entity in the AI landscape. Under this agreement, Core Scientific will lease data center space for AI cloud services—an arrangement expected to bring in around $8.7 billion over the next twelve years. Coreweave, once a cryptocurrency miner, has evolved to cater specifically to AI applications and is linked with major players like Nvidia—the tech giant behind some of the most formidable chips driving AI innovation.

Challenges Ahead

Of course, this meteoric rise doesn’t come without challenges. Analysts project that Core Scientific may not post profits this year as it grapples with the impact of changing stock warrant values—an accounting alteration that doesn’t reflect the company’s fundamental earnings. Nevertheless, projections indicate that the company could become profitable by 2025, with anticipated earnings per share (EPS) jumping tenfold by 2027. Currently, shares trade at approximately 13 times those same estimates for 2027.

Exponential Growth Potential

The data center market is poised for significant expansion as tech firms relentlessly develop more sophisticated AI systems. Out of the 1,200 megawatts of gross power capacity Core Scientific has contracted, approximately 800 megawatts are allocated for data center computing compared to about 400 megawatts for Bitcoin mining. With strong relationships with power suppliers, Core Scientific projects it can secure an additional 300 megawatts of power by year-end, without needing to acquire more real estate.

Innovative Upgrades in Data Centers

The company is not only looking at expansions but also aims to revitalize existing “distressed” conventional data centers that have lost their tenants. Core Scientific has mastered the art of rapidly transforming basic facilities into high-tech operations, employing cutting-edge resources such as liquid cooling equipment. This capacity upgrade can turn a standard server rack that typically requires about 6 to 7 kilowatts of power into a performance beast demanding as much as 400 kilowatts.

Conclusion: Keeping the Momentum

Core Scientific’s exhilarating pivot from a beleaguered Bitcoin miner to a leader in AI data hosting exemplifies how businesses can thrive amidst change. Yet, the real challenge for this company lies in sustaining its momentum. How swiftly the AI revolution unfolds will significantly determine Core Scientific’s fortunes in the coming year. As conservative investors, we must keep a keen eye on such transformations, being cognizant that in the world of rapid technological advancement, adaptability is more crucial than ever.