Compass Point Finds AI Infrastructure Stocks Trading Below Contract Value

According to a report by Compass Point, analysts Michael Donovan and Ed Engel highlight that companies like TeraWulf (WULF) and Cipher Mining (CIFR) are trading below the value of their AI data center contracts. The report emphasizes the market’s failure to recognize the future income potential from these long-term leases, despite billions in signed contracts.

Currently, many former bitcoin mining sites are being transformed into AI data centers. Compass Point presents a framework for valuing these assets, suggesting that they should be assessed based on contracted rental income instead of the volatile income from bitcoin mining operations. The analysts expect that the completion of these projects and the commencement of rental income over the next two years will significantly influence stock performance.

In conducting their analysis, Compass Point estimates the future rental income from existing contracts while accounting for building costs. This approach allows them to compare potential earnings with the companies’ market valuations. The analysis identifies Applied Digital (APLD), TeraWulf, and Cipher Mining as exhibiting the largest valuation disconnect relative to their contracted business.

"As facilities come online and signed contracts begin producing revenue, investors will focus less on future potential and more on the cash flow those projects deliver," said the analysts.

Unlike bitcoin mining, where revenue can fluctuate with market prices, AI data centers promise more stable cash flows through long-term leases. The past year has seen a considerable rise in share prices for several former bitcoin miners as they forge partnerships with AI firms seeking significant computing power and energy resources.

Despite a positive outlook, the report acknowledges variability in returns, attributed to factors such as construction timelines, financing needs, and the rate of customer signings. As the sector advances, Compass Point suggests that it is moving into a phase where successful project execution will be crucial for valuation, shifting from a focus on future partnerships to actual revenue generation from completed contracts.