Canaan File for $400 Million IPO – Third Time Lucky for the Avalon Miner Designer?Share Quick take; Canaan has officially filed to raise $400 million with an IPO on the NASDAQ stock exchangeCanaan recorded losses of $45.8 million in the first half of 2019 compared to profits of $31.8 million in the first half of 2018Although Canaan plans to expand operations into the blockchain and AI markets, over 99% of their revenue is attributed to sales Bitcoin mining machines with the majority of this revenue attributable to Chinese customers.The Bitcoin ASIC hardware market was $3.23 billion in 2018 and is estimated to grow to $4.79 billion in 2023 Hongzhou-based Canaan, the designers of the Avalon Miner hardware series, have officially filed with the SEC to list publicly on the NASDAQ exchange. The company intends to raise the amount of $400 million in an initial public offering and would trade under the ticker symbol “CAN”. This marks the third attempt by Canaan to go public, after previously filing in Mainland China and Hong Kong. In their F-1 submission, a form required for foreign entities wishing to list in the United States, Canaan outline the company performance over recent years and also highlight their growth plans and risks to investors who wish to participate in the IPO. Canaan Company Performance In the first six months of 2019, Canaan recorded a net loss of $45.8 million after generating $42.1 million in revenue. This compares to a net profit of $31.58 million after generating revenue of $283.62 million in the first half of 2018. General and administrative expenses increased by 256% in the first of 2019 compared to the first of 2018. Share-based compensation is included under this expense category indicating that Canaan may have made some significant dividend payments to equity holders in the first half of 2019. How dependent Canaan’s business model is on the price fluctuations of Bitcoin is highlighted throughout the filing. With bitcoin recording all-time highs in December of 2017, the impact of price on Canaan’s business is evident in the performance difference between the first half of 2018 and 2019 with product sales 572% higher in the former. “The demand for, and pricing of, our Bitcoin mining machines is determined primarily by the expected economic return of Bitcoin mining activities, which in turn is significantly affected by expectations with respect to the Bitcoin price, among other factors.” (p.16) Although Canaan plans on expanding its operations into providing blockchain-related services and penetrating the AI market, over 99% of its revenue is still attributable to sales of Bitcoin mining machines and parts related to these machines. The vast majority of this revenue is attributable to China with Chinese customers accounting for 87.9% of the revenue generated in the first half of 2019. Current Market Position Canaan’s market share of Bitcoin mining machine sales is estimated to be 23.3%, ranking the company second to only Bitmain. Bitmain is estimated to hold 64.5% of the market share. It is reported that the market size of sales related to Bitcoin ASIC hardware and accessories was $3.23 billion in 2018 and is estimated to increase to $4.79 billion in 2023. The filing notes Bitmain’s funding capacity as a key competitive advantage in gaining the dominant share of the market. With a limited amount of chips available from foundries, there is intense competition for the scarce supply. “Bitmain has raised multiple rounds of financing from investors and therefore has established certain funding advantages over us. Given that the leading IC foundry, namely TSMC, typically has limited production capacity and reserves such capacity for customers who are able to make prepayments first, Bitmain has been able to reserve more production capacity by relying on its funding advantages to offer larger amounts of prepayments” (p. 106) The filing also includes an analysis of Canaan hardware with a breakdown of payback periods under different circumstances. While the analysis provides strong support for Canaan’s hardware being competitive on the market, the MinerUpdate team has received a number of anecdotal reports at MinerSummit that Bitmain hardware is more reliable when compared with the hardware designed by Canaan. What hardware is optimal for any given customer can also depend on preferences and relationships formed. However, when it comes to funding advantages, Canaan acquiring an additional $400 million would certainly increase their competitiveness in the Bitcoin ASIC hardware market.