IREN–MSFT Deal: Why the Math Shows Strong Long-Term Profitability, Not Losses
Some people really don't understand the math behind large infrastructure projects. $IREN Ltd(IREN)$
- 5-Year $Microsoft(MSFT)$ contract is $9.7B
- At 85% margin, that's $8.25B EBITDA
- Construction $3B
- GPU and other infra $5.8B
- Total cost $8.8B vs $8.25B in EBITDA
Some look at this and say, "IREN will lose $555M on the MSFT deal."
That's not how it works, you don't recoup a 20-year capex investment with a 5-year contract.
1) You must amortise the $3B construction expense over the 20-year useful life, which is $150M per year, so $750M over 5 years.
2) That $5.8B is not just GPUs, it also includes likely networking, cooling, storage, and others. GPUs useful life is 4 years, but that other equipment has 6-10. Let's assume that the average useful life of this investment is 6 years. That's $97M per year, $4.83B over 5 years.
3) So in 5 years of the contract, $IREN makes $8.25B in EBITDA - $750M construction depreciation - $4.83B equipment depreciation
= $2.67B in project earnings over 5 years.
That's an EBIT of 27.5%.
Really good for a large infrastructure project.
Furthermore, this discussion always ignores the favourable cashflow dynamics that Iren negotiated. $MSFT pays for 1 year in advance, crediting the pre-payment towards years 3-5 of the project.
So project cashflows will look like this:
Now: $1.94B
Year 1: $1.94B
Year 2: $1.94B
Year 3: $1.29B
Year 4: $1.29B
Year 5: $1.29B
So front loaded cashflows means that Iren can essentially use the "profits" to build the project, before even generating said profits.
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