Why IREN Limited Stock Crashed Nearly 20% in July

Shares of IREN Limited (NASDAQ: IREN) slipped 19.50% in July, according to data from S&P Global Market Intelligence. The neo-cloud provider for artificial intelligence (AI) fell along with many other thematic stocks this month and came under pressure after management awarded itself massive executive compensation.

The company is trying to build a data center business for AI compute, a hot stock market theme at the moment, but faces significant competition. Here's why the stock fell in July and whether it looks like a buy right now.

Transitioning from crypto mining to cloud computing

IREN began operations as a cryptocurrency miner, which involved buying up a bunch of advanced computer chips for processing. It turns out those chips can be repurposed for AI compute, which is facing a massive shortage at the moment. IREN management decided to pivot its business toward building data centers for the AI market and recently won a $3.4 billion contract from Nvidia, which plans to start early next year.

The company has not seen soaring revenue yet, but it is in the middle of building a massive number of data centers to serve partnerships like Nvidia. It plans to deploy 5 gigawatts of computing power across the globe for AI infrastructure, which, at today's prices, could translate into tens of billions in revenue.

Investors are not so certain this will happen, and if the company is focused closely on this matter. Shares of the stock fell in July when management was granted restricted stock units (RSUs) valued at $832 million at the time of the grant. IREN currently has a market cap of just $14 billion, meaning this is a sizable portion of its outstanding shares.

What's more, the company signed a deal to become a jersey sponsor of the Golden State Warriors. This is coming at an inopportune time, when the company needs to spend billions on capital expenditures to build its data centers.

Image source: Getty Images.

Should you buy IREN stock?

You might think it is smart to buy IREN stock at a market cap of $14 billion when its revenue could soar to tens of billions in the years ahead.

However, it is hard to see how the company gets the funding to do this. It is currently burning $2.2 billion in free cash flow per year, which will wipe out its cash balance in about 12 months. To build all this infrastructure, the company will need far more cash than this, and it is already taking on significant debt to do so.

This looks like a tough liquidity situation that may prevent a management team -- already with one eye off the ball -- from executing on its stated vision. Stay away from buying the dip on IREN Limited stock.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.