Most experts agree we are still in the early innings of the artificial intelligence revolution, with companies providing artificial intelligence (AI) computing seeing outsize demand. Among those AI companies are the "neoclouds," which provide AI data centers to AI companies and cloud infrastructure players alike.
Among the neoclouds, Iren Limited (IREN +0.84%) stands out for its vertical integration. That means it owns the land and the data centers it's building and will run those data centers if the client wishes.
Iren was among the first to lock up power-connected land, years before the AI boom, when it was a Bitcoin miner. But after Iren converted its assets to AI computing, the stock skyrocketed, up a whopping 775% over the past year.
However, Iren is also about 36.5% below all-time highs. Meanwhile, there's a plausible case for even greater gains -- possibly a 10x return -- if the company fills its capacity.
NASDAQ: IREN
Key Data Points
How much is 4.5 GW of power-connected data centers worth?
In its last earnings release, Iren announced it had secured another 1.6 gigawatts (GW) of grid-connected land in Oklahoma.
Securing power-connected land is difficult these days, and Iren's management noted it had been working on this transaction for years. The capacity of the new Oklahoma property complements Iren's 160 megawatts (MW) of data centers in Canada and its massive 2.75 GW footprint across two Texas locations. That brings Iren's total footprint to 4.5 GW.
Just how much money could that capacity bring in? This, of course, depends on the terms under which it rents graphics processing units (GPUs) to customers.
In addition to a few smaller deals, Iren has inked one massive deal with Microsoft (MSFT +0.60%) thus far. The Microsoft deal will bring in $1.94 billion in annualized revenue, at 85% project-level EBITDA margins, across 200 MW. All in all, Iren has projected $3.4 billion in annual recurring revenue this year across only 460 MW of capacity -- or just over 10% of its total capacity. That revenue per MW is actually a bit lower than the average rate in the Microsoft deal, but that could be because Microsoft used the latest and greatest Nvidia GPUs. Given that future projects could use even more advanced chips, revenue per MW may be even higher.
Using Microsoft's terms to extrapolate revenue and margins per megawatt into the future, Iren's 4.5 GW would generate $43.65 billion. If the 85% adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin holds, that would amount to roughly $37 billion in adjusted EBITDA, though maybe a little less when corporate costs are factored in.
Today, Iren trades at a market cap of just $15.8 billion and an enterprise value of just $16.2 billion. Given that Iren's potential capacity could eventually yield annual profits that dwarf the entire company's value today, it's no wonder some think bigger gains are ahead for Iren.
Image source: Getty Images.
But someone has to fund it all
While this potential is tantalizing, there are two big limiting factors for Iren: funding and GPU longevity. It takes a lot of money to build Iren's data centers, and it will have to fund that build-out either with internal cash flow or with a combination of equity, debt, and/or convertible debt sales.
It's unlikely Iren will be able to generate the cash flow needed to self-fund these build-outs for the foreseeable future, so it will likely have to take on much more debt and dilute shareholders.
Then there's the question of whether Iren's current GPUs will still be in demand when contracts expire. The Microsoft contract is a five-year contract, and whether Iren will be able to continue renting these chips out afterward will be a big determinant of its value.
Today, things are looking good on that front. According to prominent semiconductor industry analyst SemiAnalysis, Nvidia H-100 one-year rental prices were up 40% from their October lows.
As long as that strong demand holds, Iren's business model will be proven out. If older GPU chips remain in strong demand for more than five years, then 10x gains for Iren are certainly possible.
