I’m Bottom Fishing This Data Center Play the Right Way
SpaceX has confirmed the strong need for data centers with power supplies.
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Market breadth isn’t as strong on Wednesday morning as it was on Tuesday, but it is still healthy at about 58% positive. Notably, the number of new 12-month lows has contracted to about 100 early in the day, versus 50 new highs.
SpaceX (SPCX) is helping to boost the AI group, but there is also strong small-cap action, and the biotech sector continues to bounce, with the SPDR S&P Biotech ETF (XBI) up another 1%.
I decided to hold my entire SpaceX position and will instead be looking to buy on a pullback. There is a large lockup expiration coming that may offer an opportunity. One of the interesting things about the SpaceX IPO was that many institutional buyers waited to upsize their positions until unlocked shares put some pressure on the stock. As a result, the stock has digested these large unlocks well.
The SpaceX conference call is making me look harder at the data center area. I am starting a partial position in TeraWulf (WULF) as a bottom fish. The story is interesting, but in addition, the setup allows for a lower-risk entry with a clear stop.
What the Company Is
TeraWulf began as a bitcoin miner and has turned itself into a landlord for AI computing. It owns a campus in western New York with cheap hydro and nuclear power, builds data centers there and leases them for 10 years to Fluidstack, a cloud provider whose rent is guaranteed by Alphabet (GOOGL). Alphabet also owns about 14% of the company. A second campus in Kentucky has a lease with Anthropic for about 400 megawatts. The business is power first, buildings second and the tenants carry investment-grade credit.
The stock has lost more than half its value since summer, although nothing in its contract book has changed. What changed is the mood around AI infrastructure. Rates are up, financing costs are up, and the whole group of former miners turned data center builders was sold as a block. Cantor Fitzgerald cut its target to $30 from $37 last week and called the stock a generational buy in the same note, which shows how far the price has drifted from what analysts think the leases are worth. Morgan Stanley raised its target to $65. Wall Street is unanimously bullish, and the stock does not care, which is usually what a washout looks like.
Demand Is Not the Problem
Two things make this more than a sector bounce trade. SpaceX said on Tuesday night that it expects to have about 2 gigawatts of computing capacity by year end and is aiming for 10 to 20 gigawatts by the end of 2027. Demand for data center space with power is not in question. At the same time, Bernstein estimates that only about one-third of the planned U.S. data center pipeline is credible. If most of the promised supply never shows up, the sites that already have power become the scarce asset. TeraWulf’s CEO put it in one line on X last week: the question is whether the site is energized. His answer is yes, and the next data facility at Lake Mariner is due this quarter at the cost he has guided to all year.
How to Bottom Fish
This is also an example of how I like to bottom fish. The temptation with a story this good is to buy into the teeth of the decline because the price looks cheap against the leases. That is how you end up adding to a loser three times on the way down. The better way is to wait for the selling to exhaust itself and for the stock to show some relative strength, and only then put money to work with a level to manage against.
TeraWulf has done that. It stopped going down, turned up off its lows while the group was still soft and built support around $11. That level is the stop. If the stock trades back through $11, the bounce has failed, the selling is not finished and the trade is over, no matter how good the contracts look. Above it, my plan is to take a starting piece here and add as the stock holds and builds, not on further weakness.
Where the Thesis Breaks
The thesis fails if the fourth building at Lake Mariner slips or if the company has to raise equity after saying it will not. Rates are the other issue. The bull case depends on the value of long leases going up as the credit markets calm, and if the 10-year keeps climbing, that will take longer. The third-quarter report is expected in the second week of November, and I would rather be positioned ahead of the delivery news and catch some positive anticipation than bet on the number.
At the time of publication, DePorre was long WULF and SPCX.
