Summary Canaan has been under pressure since March 2021, when its share price started to collapse. Since December 26, 2022, when Bitcoin was showing signs of having found a bottom a month earlier, it has rebounded from its 52-week low. During this time of low Bitcoin prices, the company is focusing on cutting costs, stabilizing cash flows, and investing in R&D for the purpose of developing new products. The performance of the company will continue to be affected by Federal Reserve policies, which have a negative impact on high-growth tech stocks. Canaan Inc. ( CAN ), a company that competes in the Bitcoin (BTC-USD) mining, ASIC computer chip and computer markets, has had a tough couple of years, falling from a two-year high of approximately $39.00 per share on March 8, 2021, to its recent 52-week low of $1.87 on December 28, 2022. Most, if not all of its performance is directly related to the monetary policies of the Federal Reserve, which have driven down the price of Bitcoin while having a negative impact on the cryptocurrency sector. Looking ahead, the major issue for the company is whether or not the Fed is getting close to reaching the upper limit of its interest rate increases, or it will continue on for a period of time because of the strong labor market, and in some areas of the market, ongoing stubborn inflation. I still hold to my thesis that the Fed doesn't have a lot of room left to boost interest rates because of the pressure it would put on the U.S. government to pay its rising bill. While I do believe there will be some more interest rate increases, I also believe it won't go much above 5 percent as a ceiling because of it being cost-prohibitive to the Federal government. With that in mind, while I think it's possible for Bitcoin to take another dive before entering into a period of a sustainable upward move, it appears the worst may be over, even if it once again tests its recent low; I don't see it lingering near the $16,000 mark or slightly lower for any prolonged period of time. I tend to think it's not going to drop to that level again, but it's possible that it could. But even if it does, I think the share price of CAN will hold above its 52-week low based upon it doing so when Bitcoin crashed below $16,000 in the latter part of November 2022. In this article we'll look at some of the numbers from its latest earnings report, and more importantly, how management is framing and responding to the current weak environment in the cryptocurrency sector. TradingView Some of the numbers Revenue in the third quarter of 2022 was RMB916 million (US$137.5 million), compared to revenue of RMB1.3 billion in the third quarter of 2021 - down 25.8 percent. Gross profit in the third quarter of 2022 was RMB234.2 million or US$32.9 million, down 74.8 percent sequentially, from RMB929.7 million in the second quarter of 2022, and down 68.4 percent from RMB741.7 million in the third quarter of 2021. Net income in the reporting period was RMB61.00 million (US$8.6 million), or US$0.34 per diluted share. Cash and cash equivalents at the end of the third quarter of 2022 was RMB2.00 billion (US$281.5 million). It should be taken into consideration that these numbers will be lower in the fourth quarter of 2022 because the price of Bitcoin fell significantly below what it had been trading, on average, in the third quarter of 2022. So, while expectations for the fourth quarter should be low, if the price of Bitcoin continues to recover, the numbers for the first quarter of 2023 should show meaningful improvement over the third and fourth quarters of last year. Whether or not that will be the end of negative conditions CAN has been operating in will be determined by the actions of the Federal Reserve. Preparing for the inevitable turnaround Since the price of Bitcoin and the actions of the Federal Reserve are out of control of CAN, management is taking steps to endure the crypto winter, as well as position itself for the inevitable rebound in the price of Bitcoin, which will be a powerful tailwind for the company. To that end, CAN has changed its focus to cutting expenses, investing in R&D for the purpose of developing new products, and stabilizing its cash flow. After using some of its Bitcoin holdings to pay for mining costs in the third quarter, the company had 535.5 Bitcoins left; that's 188.7 Bitcoins more than it had in the second quarter of 2022. Another step it's taking in regard to its mining business is to diversify geographically in order to mitigate risk, using this time to expand its global footprint. As for further deploying machines geographically in its mining business, the company expects to have an increase in depreciation in relationship to its total costs. One particular thing I like in CAN's strategy is the fact it is continuing to invest in R&D and isn't going fully into survival mode. Having cash and cash equivalents of US$281.5 million is a positive catalyst it has at its disposal, which should pay off for the company in the long term. That is evidenced from the introduction of two new mining machine models in the reporting period, which management claims is "a significant improvement over the previous generation of mining machines." At the time of the earnings report management said it's preparing to mass produce the two new mining machines, saying mass shipments should launch no later than the early part of 2023. General outlook During the last earnings call the company said that within the current macroeconomic and interest rate environment, it expected the price of Bitcoin to remain under downward pressure, and in fact they were right in that outlook. It also noted industry confidence would likely wane, which also came about, as did overall sentiment for Bitcoin and the general cryptocurrency market. Taking that into consideration, management stated it was likely to have another tough couple of quarters ahead, which include the fourth quarter of 2022 and the first quarter of 2023. There's no doubt the numbers from the fourth quarter are going to be underwhelming based upon the further drop in price of Bitcoin during that period of time. On the other hand, if the price of Bitcoin holds support and moves up from where it has been trading at recently, there could be an upward surprise in the first quarter results of 2023. While that would be welcome, what's most important is how Bitcoin does for the remainder of 2023, what steps the Fed takes, and what investor sentiment for Bitcoin is in the quarters ahead. In the near-term investors shouldn't expect too much out of CAN, but further out it should do very well unless there's an unforeseen event, or the global economy plunges into a severe and prolonged recession. To get an idea of what management thinks, it guided for total revenues for the fourth quarter of 2022 to be approximately RMB310 million. That's very low, but based upon economic visibility and the ceiling I see concerning how high the Federal Reserve can raise interest rates, I think that's going to be the bottom for the company. Conclusion I like what I heard in the third quarter earnings report, in that management had a solid grasp on the challenges it faced, and didn't shy away from discussing them and how it would impact the short-term performance of CAN. I also liked its basic overall strategy of not only cutting costs, which was a given, but also maintaining its momentum concerning R&D and not holding back on developing new products that should be a tailwind as the crypto market eventually turns around. For the most part, I think the worst is over for CAN, and even if there are a couple of more bumps on the road, I don't think the stock is going to collapse, even if there are some more corrections in the price of Bitcoin before it begins a sustainable upward move. Since reaching its 52-week low on December 28, 2022, the stock has recovered nicely, pushing up to approximately $4.00 per share before pulling to about $3.00 per share as I write. It wouldn't surprise me to see it correct because of that quick upward move, but barring a major negative catalyst that isn't visible at this time, I think the company has seen its worst and will probably trade somewhat level in 2023 until the price of Bitcoin confirms it is in recovery mode.
