Mechanical Technology: A Hidden Gem in a Crypto Mine
The company is a quality crypto miner that has explosive growth opportunities, strong intrinsic advantages and high upside
Summary
The company has strong environmental and power cost advantages over competitors.
The CEO is aligned with shareholders, encourages transparency and communication and sets attainable goals while maintaining a long-term vision for the company.
If Soluna only produced 50 MW on a yearly basis, given the earnings growth that would occur, the company is selling for a significant discount.
Mechanical Technology Inc. (MKTY, Financial), which is soon to be renamed Soluna Holdings, operates two businesses: MTI Instruments and Soluna Computing. Both businesses are profitable and growing at a fast rate while producing high returns on invested capital. The company was unknown for some time until fund manager Michael Toporek (founder of Brookstone Partners) took over as CEO, increased profitability, kick-started growth and brought it out of the darkness in 2018.
The company is now listed on the Nasdaq with 12.7 million shares outstanding and a market cap of $103 million. Toporek currently owns 38.2% of Mechanical Technology and has only increased his position in the company since taking control.
MTI Instruments
MTI is engaged in the design, manufacturing and selling of vibration measurement and system balancing solutions, precision linear displacement sensors, instruments and system solutions and wafer inspection tools. These products are critical to the manufacturing and inspection of airplanes, electric vehicle batteries, semiconductor wafers and a plethora of other products.
Most of MTI’s revenue (42.9% as of 2020) is generated from the U.S. Air Force. This high customer concentration is slightly concerning, but the Air Force has proven to be willing to continue buying its products. These products mainly consist of portable balancing systems and precision instrument products, which are critical to the inspection of aircraft and related equipment, so it would be difficult for customers to switch suppliers. Therefore, I believe MTI will be able to maintain the Air Force as a customer in the coming years.
Since 2020, management has indicated that MTI has seen significant increased interest for its PBS, diagnostic equipment and semiconductor products. The new interest has been from EV manufacturers and semiconductor companies. The management team has noted they are actively in communication with such companies and expect the development of these new market opportunities to accelerate growth.
MTI Instruments' growth and profitability have been impressive over the past several years.
Revenue grew a healthy 36%, while net income increased 397%. This is fast growth, which I see continuing in the future. Of course, I don’t expect net income to continue climbing at such an eye-popping pace in the coming years.
Based on what management has been communicating to shareholders, revenue and profitability growth will continue into the long term. I estimate MTI will grow at a compound annual rate of 15% over the next five years.
MTI seems to be an efficient company with a large addressable market that operates profitably and will be able to grow both profits and revenue over the coming years. Though management has stated MTI will not be a major contributor to earnings in the future, it remains a quality subsidiary. There is also a possibility that management chooses to spin-off MTI into its own stock or sell the business outright to fund the crypto mining operations and its future growth. I do not see this happening soon, but maybe in the future.
Soluna Computing
Soluna Computing is Mechanical Technology's crypto mining operation.
On Aug. 12, the company announced that its subsidiary, EcoChain, was acquiring Soluna Computing. Management also announced the company will be renamed “Soluna Holdings,” along with EcoChain being renamed “Soluna Computing”.
Following the acquisition announcement, management gave a presentation laying out the new crypto mining operation and its target goals for the coming years.
EcoChain is on target to produce at least 50 megawatts by year-end 2021. Soluna Computing has a massive pipeline of over 300 MW that will be integrated into the mining operation over the next several years. As the MW are integrated, revenue and earnings will skyrocket.
This acquisition will place Soluna in the top three of mining companies in terms of MW produced, making it a major player in the crypto mining industry.
The CEO has communicated that the long-term goal is to provide low-cost alternative energy data centers for all things related to blockchain and crypto mining.
Key advantages
Soluna Computing operates as one of the few 100% environmentally-friendly crypto miners. As stated in the company’s presentation, it will generate most of its MW power through wind, along with utilizing natural gas when necessary.
This is an advantage over competitors as companies and governments have expressed concern over the negative effects crypto miners are having on the environment. If Soluna can continue to maintain its eco-friendly image, it will likely become the preferred supplier for many customers.
Although Soluna chose to enter the crypto mining space, it has significant data center infrastructure and advantageous power costs that give it the ability to pivot to many industries that require computing. I believe this is management’s long-term intention.
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