BitFuFu: A Buy Is Becoming Difficult To Justify (Rating Downgrade)

Summary BitFuFu is downgraded to Hold after Q1 FY26 results reveal persistent tight margins. FUFU’s dual-engine model hedges revenue volatility, with cloud mining now 79% of revenue, but cost structure remains burdened by related-party hosting fees. Operational efficiency improved: hashrate under management rose 25.7% YoY while power capacity fell, yet gross margin stayed minimal at 0.51%. The balance sheet remains strong with $141.5 million in liquid assets, but significant working capital is tied up with related parties, further adding cash conversion risk. BitFuFu ( FUFU ) reported Q1 FY26 earnings yesterday (May 29), and the reported headline metric triggered a sell-off. FUFU went down ~8% on the earnings and closed yesterday's session at $1.86. The headline showed a $35 million GAAP net loss, increased from a $16.9 million loss in Q1 FY25. But the encouraging part is that the loss was mostly driven by a $35.6 million non-cash fair value adjustment on BitFuFu's Bitcoin ( BTC-USD ) holdings due to Bitcoin's price swings in Q1. I have covered FUFU since 2024 and have reiterated a Buy on FUFU in all my previous coverages. I am downgrading FUFU to a Hold in this update. BitFuFu is one of the few digital asset mining companies that runs a flexible crypto mining business model, which helps the company hedge against volatility in times of Bitcoin price swings, just as we have witnessed with Bitcoin lately. The premise of my past Buy ratings has been based on the company's "dual-engine" architecture (combining cloud mining and self-mining economics), in addition to the fact that it was a fairly nascent miner founded in 2020, thus having room to grow hashrate and electricity capacity at scale. CoinWarz In the Q1 results, the dual-engine architecture is proving its worth as a fundamental hedge in the top line. When Bitcoin network difficulty ticks up (which reached new highs late last year and is up ~20% YoY) and hash price squeezes direct mining margins, BitFuFu unloads that operational risk onto cloud users while they earn from the more stable infrastructure fees from cloud mining. Q1 FY26 income snapshot (Q1 earnings press release) BitFuFu's total Q1 revenue came in at $72.7 million, a dip of 6.8% YoY. Despite the YoY revenue decline, the revenue composition is what is encouraging. Cloud mining revenue percentage of total revenue increased by 1030 basis points. In Q1, Cloud mining revenue made up 79.1% of total revenue compared to 68.8% a year ago. Q1 FY26 cost of revenue (Q1 earnings press release) While the revenue composition is moving in the right direction, Q1 margins were tight. Total cost of revenue was $72.3 million, meaning BitFuFu earned a meager $0.37 million in gross profit and ~0.51% in gross margin. Management attributed the cost of revenue bloat to carrying costs incurred by related and third parties hosting their self-mining operations - a meaningful portion of FUFU's cost of revenue flows to Bitmain-affiliated entities, and this is one of the risks I flagged in my initiating coverage of FUFU two years ago. This brings up the first main concern I have with the Q1 numbers because if you look at a year ago, the cost of revenue was already consuming virtually all of the top line. Not much has changed in that regard a year later. Excerpt from my June 2024 FUFU coverage (Seeking Alpha) Ordinarily, the margin compression should have prompted a harsher downgrade for FUFU to a Sell at this juncture, but the fact they managed to scale total hashrate under management by 25.7% (reaching 25.9 EH/s) while utilizing less absolute power capacity (457 MW compared to 478 MW a year ago) means they are improving operational efficiency and better hashrate per unit of energy input. These efficiency gains, in addition to a planned fleet upgrade, give some hope on the prospects of margin expansion in the near term. As disclosed earlier, the cloud segment commanded the larger part of total revenue. The cloud segment should have offset the margin drag the hosting fees paid to related and third parties of the self-mining operations caused in Q1. But that also failed to show up in the gross line because the cloud segment carries its own hosting cost burden (also paid to related and third parties) that sits inside the same cost of revenue. This indicates that FUFU is not collecting cloud mining fees against a meaningfully lower cost base. They are paying to provision the underlying hashrate that backs those cloud contracts through the same related-party hosting arrangements that are compressing self-mining margins. The 79% revenue mix from the cloud segment creates the appearance of an asset-light, high-margin business. But the cost of revenue line shows that the infrastructure supporting those cloud contracts seems to be neither asset-light nor cheap. Q1 results show that the cloud segment is merely hedging revenue volatility, not the cost structure. But that is not to totally overlook the value the cloud segment adds to the company and the hedge to volatility it provides for the top line. I believe that hedge will become meaningful in Q3 based on management's timeline of a fleet upgrade to Antminer S21 XPs by then. I also anticipate gradual margin expansion by then. But this still depends entirely on whether the new high-efficiency fleet materially lowers the cost per coin paid to those hosting counterparties. If the Bitcoin price surges by then too, that would be an additional tailwind, as BitFuFu would be making more revenue in dollar terms for every unit of hashrate. The evidence from those forward-looking metrics is needed to be able to justify a Buy again. Assets side of Q1 FY26 balance sheet (Q1 earnings press release) While the income generation stalled, BitFuFu still maintains a fairly strong and liquid balance sheet. The asset side of the ledger provides a liquid cushion of $141.53 million, composed of $36.22 million in cash and cash equivalents and BTC held valued at $105.31 million. When stacked against a market cap of just ~$330 million, the liquid assets alone account for around 43% of the FUFU's total value today. This is another reason I am being selective on the downgrade and not pushing for a Sell rating. Total current assets sit impressively at $247.8 million. Looking closer at the balance sheet, I find that the "Amounts due from related parties" line is a high $45.4 million. The good thing is that that line reduced from around $75 million a year ago to the $45.4 million recorded in Q1, meaning related parties paid down what they owed FUFU, which is positive for cash conversion. But combined with the cost of revenue flowing to those same parties, it shows that FUFU's financial statements are materially intertwined with affiliated entities on both sides of the ledger. Accounts receivable is also $12.4 million, which adds another layer of near-term cash conversion risk on top of the internal balance held up by related parties. Liabilities side of Q1 FY26 balance sheet (Q1 earnings press release) On the liabilities side, there is $59.6 million of current liabilities. The liquid assets alone are larger than current liabilities and puts BitFuFu in an insulated financial position in the short term. The liabilities also have an "Amount due to related parties" line of $4.87 million. In contrast to the asset side's amount due from those parties, the imbalance shows BitFuFu is a net creditor to its affiliates, meaning more cash is tied up with related entities than is owed back to them, which reinforces the view that working capital is partially trapped inside internal counterparties. Takeaway With all I have laid out in this piece regarding the tight margins, revenue quality and composition, and working capital tied due to related parties imbalances, reiterating a Buy would mean I have become a FUFU permabull. I think a downgrade to Hold is justified at this juncture until the planned fleet upgrade later this year is executed and gradual margin expansion follows.