Why IREN Limited Rallied Almost 40% in May

Shares of AI neocloud IREN Limited (NASDAQ: IREN) rallied 39.6% in May, according to data from S&P Global Market Intelligence.

May was a very active month for IREN, which included third-quarter earnings, a new formal partnership with Nvidia (NASDAQ: NVDA), and a couple of acquisitions. Coming off a stock price downturn amid concerns over higher interest rates during the prior month, the positive developments catapulted IREN's stock in May.

IREN reports, announces big deals

On May 5, IREN reported third-quarter results, with revenue declining 21.6% to $144.8 million, while adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell 20% quarter-over-quarter to $59.5 million.

Those don't look like great results, but actual results are kind of beside the point for IREN, which is intentionally ramping down its Bitcoin (CRYPTO: BTC) mining business while pivoting to becoming an AI neocloud. Bitcoin mining still accounts for a majority of revenue, which explains the decline in revenue and profit, even as AI cloud services nearly doubled quarter over quarter.

More important to IREN were the flurry of operational milestones and acquisitions announced during the month. In early May, IREN announced the energization of the substation that will power its massive Sweetwater 1.4 gigawatt (GW) data center, which is part of a broader 2 GW site. The move shows confidence in the Sweetwater site, IREN's largest, which is slated to ramp up construction in 2027.

IREN followed up that announcement with two acquisitions. At the beginning of May, IREN announced it was buying Mirantis, a cloud services provider, for $625 million in stock, and then Nostrum Group, a data center developer in Spain. The deal amount for Nostrum wasn't formally announced, but analysts estimate it was roughly 165 million euros, split between cash and stock.

Mirantis has 1,500 enterprise clients, helping businesses operate and run AI data centers, including bare-metal and Kubernetes environments. The acquisition should help IREN's vertical integration efforts into customer-facing services and boost its technical expertise, along with Mirantis' existing revenue and profits.

Nostrum Group paves the way for IREN to expand into Europe by acquiring Nostrum's 490 MW of grid-connected power and its existing development pipeline in Spain, which has low-cost power and an AI-friendly regulatory regime.

Image source: Getty Images.

However, perhaps the most consequential announcement of the month was a new partnership announcement with Nvidia (NASDAQ: NVDA). The two companies agreed to support the deployment of up to 5 GW of Nvidia DSX AI factory architecture over time, while Nvidia also received a five-year warrant to buy 30 million shares of IREN stock at a strike price of $70 per share. Additionally, IREN secured a five-year, $3.4 billion cloud contract with Nvidia, apparently for Nvidia's own internal use.

This is a pretty interesting development. Nvidia is the main vendor of AI GPUs for IREN, which IREN would deploy in data centers and rent to AI companies or major cloud computing vendors such as Microsoft. However, it appears Nvidia would like the option to deploy 5 GW, or essentially all of IREN's current capacity, for its own custom DSX architecture.

While the end customer of that deployment is uncertain, it appears that Nvidia likes IREN's massive footprint of low-priced, grid-connected land and may want to take at least partial ownership of it. That suggests Nvidia either wants to use the capacity for its own software offerings, or rent it out itself to potentially bypass cloud middlemen like Microsoft. While the ultimate aims of the partnership are unclear, any endorsement from Nvidia is likely to boost a stock.

IREN still has a chicken-and-egg problem

In May, IREN made significant operational progress in execution, expansion, and deepening its relationship with Nvidia. However, it will still need to raise substantial capital to fund its build-out. The stock price is still below $70, so not quite at the range where Nvidia would buy equity in the company.

IREN did make progress on the funding front as well, raising nearly $3 billion in convertible notes later in the month. Thanks to the stock's rise at the beginning of May, IREN was able to sell these 1% notes with a conversion feature at around $73 per share; however, IREN also bought capped calls with some of the proceeds to raise the conversion strike to over $110.

All in all, IREN demonstrated its immense ambition with the May acquisitions, gained increased confidence with the Nvidia announcement, and raised more money at what appear to be good rates. It remains to be seen whether it can fund its entire build-out and whether AI-related computing demand will sustain for many years. However, if things work out, IREN has very high upside -- though it also carries significant risks.

Billy Duberstein and/or his clients have positions in Bitcoin, Iren, and Microsoft. The Motley Fool has positions in and recommends Bitcoin, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.