IREN's AI Client Expansion Masks Underlying Volatility and Overvaluation

What happened

IREN Ltd reported a record $240 million in quarterly revenue and announced an expanding AI client base with multi-year wins, suggesting potential growth diversification beyond Bitcoin mining. However, the DeepValue master report reveals that over 95% of FY25 revenue still came from Bitcoin, and recent net income of $385 million was driven by $665 million in unrealized gains on financial instruments, not durable operating earnings. The company's aggressive multi-GW build-out is funded largely through serial equity issuance and $990 million in convertibles, resulting in negative interest coverage and high EV/EBITDA of 47x, indicating financial strain. While the AI Cloud Services segment shows promise, it contributed only $7 million in the last quarter, remaining nascent and insufficient to offset Bitcoin's inherent volatility. Despite the optimistic news, the stock's 150% rally over 12 months prices in best-case outcomes, leaving minimal downside protection if Bitcoin prices or AI demand falter.

Implication

The expansion of AI clients and multi-year contracts could enhance revenue durability if successfully scaled, but current contributions are too small to meaningfully diversify away from Bitcoin dependence. Continued reliance on Bitcoin mining ties earnings to volatile cryptocurrency markets and regulatory headwinds, exposing the company to cyclical downturns. Financial health remains precarious due to substantial convertible debt and reliance on external funding, increasing the risk of equity dilution or distress in adverse scenarios. For the stock to justify its elevated valuation, sustained and profitable AI growth must materialize with creditworthy contracts, which is unproven given the company's limited track record in this segment. Until there is clear evidence of contracted AI cash flows and improved balance sheet metrics, the investment thesis skews unfavorably, aligning with the DeepValue report's 'POTENTIAL SELL' judgment.

Thesis delta

The new article on AI client expansion provides incremental positive data but does not fundamentally alter the cautious 'POTENTIAL SELL' thesis from the DeepValue report. It highlights management's efforts towards diversification, yet the scale and durability of AI growth remain unproven, with no shift in the core risks of Bitcoin volatility and financial leverage. Investors should await stronger evidence, such as multi-year, creditworthy AI contracts and sustained cash generation, before considering a more bullish stance.