Artificial intelligence requires two essential ingredients: electricity and silicon. Yet they are not equally valuable. During the cryptocurrency boom, companies snagged as much access to power as possible to fuel their bitcoin-mining facilities. With chatbots now ascendant, they are renting out this scarce asset to AI operators. Those who choose to simply hawk electrons have won higher valuations than rivals hoarding electronics to offer full-service data centers. It’s a verdict on what the truly durable resource in a post-ChatGPT world will be.
Morgan Stanley analysts foresee 68 gigawatts of US data-center power demand between 2026 and 2028, some 38 gigawatts more than projected supply. Crypto miners collectively control roughly 14 gigawatts of operational and planned capacity, Bernstein estimated in November.
Miners split between landlords and full-service operators
The paths these companies have taken to joining the chatbot boom have diverged. Cipher Digital CIFR.O, TeraWulf WULF.O and Hut 8 HUT.O are becoming powered-shell providers, effectively acting as landlords that sign leases stretching as long as 15 years. IREN IREN.O, by contrast, wants to be a one-stop provider of computing power, like so-called neoclouds such as CoreWeave CRWV.O or Nebius NBIS.O. A five-year contract with Microsoft MSFT.O, announced in November, leaves it owning and operating the underlying infrastructure.
Long-term powered shell leases, which involve renting bare-bones data center facilities with access to power, usually generate up to $2 million of annual revenue per megawatt, as per Jefferies research. Neocloud contracts can bring in closer to $10 million, according to Freedom Capital Markets analyst Paul Meeks. Yet investors value the simple landlords more richly. Hut 8, Cipher Digital and TeraWulf trade at roughly 15, 12 and 7.7 times expected 2028 sales, respectively. IREN trades at about 2 times, according to Visible Alpha.
Returns depend on chips, facilities and valuation assumptions
There’s reason for caution. IREN's $9.7 billion Microsoft agreement includes a 20% prepayment. The company needs to spend $5.8 billion on AI-focused chips and $3 billion on various other costs, based on terms outlined by the company. It has managed to secure $3.7 billion in financing for the chips. Jefferies and Bernstein analysts' research suggests the project will generate about $1.6 billion of EBITDA per active year of the contract. The implied internal rate of return could be 12%, Breakingviews calculates. But that’s only if the silicon retains 25% of its initial value, with the data center facility itself still worth between $10 million and $15 million per megawatt of capacity.
If the chips fall to 5% of their initial worth, the return sinks to 7%; if the data center’s value also tumbles to $5 million per megawatt, the return is a mere 3%. In contrast, the powered-shell providers are set to collect steady rents over much longer contracts that include annual rent escalation terms. Even if those rents become threatened because of a specific AI-focused tenant, they have taken no risk on chips, and can try to cut more standard data center deals akin to traditional operators like Equinix EQIX.O or Digital Realty Trust DLR.N.
This may still be early days. IREN's newer agreements suggest improving economics, with revenue exceeding $20 million per megawatt. If the chip crunch gets even tighter, there could also be more upside. For now, though, investors seem to prefer megawatts to megahertz.
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