Is Silvergate Capital Stock a Buy?
Actions of the cryptocurrency banking platform Silvergate Capital (IF 1.05%) have been slaughtered lately. The Federal Reserve is raising interest rates and recent comments from Fed officials indicate that monetary policy tightening may be underway in an effort to bring inflation down. Cryptocurrency prices are falling, and Silvergate shares with them, as higher interest rates reduce the current value of risky assets.
However, Silvergate Capital has a lot going for it right now in the booming crypto space. Is this stock a good long-term buy?
More than a crypto price game
Cryptocurrencies and digital assets in general are highly volatile when it comes to daily price fluctuations. However, Silvergate’s revenue generation does not rely on crypto prices remaining high. Its Silvergate Exchange Network (SEN) facilitates money transfers for exchanges, traders, and institutions in the crypto market. So it is the activity level in the crypto universe that matters more than crypto prices.
This is illustrated in the Q4 2021 report. Cryptocurrencies boomed, then crashed in the final months of the year (on the above-mentioned growing rhetoric on interest rates). But SEN still recorded healthy gains, handling $219 billion in money transfers in the fourth quarter – a 35% increase from the previous quarter and a 270% increase from the year-ago period. . As a result, Silvergate said its total net income was $21.4 million, down from just $9.1 million in the fourth quarter of 2020.
A good risk-reward investment?
Following its Q4 2021 update, Silvergate said it had acquired assets from Diem Association, the crypto project formerly led by Metaplatforms (NASDAQ:FB) (parent of Facebook, Instagram and WhatsApp). Silvergate plans to launch a stablecoin later this year with these assets.
Additionally, the company has released a steady stream of newsworthy headlines over the past few months. It expanded the SEN to include money transfers in euros and issued $205 million Bitcoin (CRYPTO: BTC) guaranteed loan to MicroStrategy (NASDAQ: MSTR) subsidiary company. Clearly, this crypto bank is on the right track with its digital money movement platform.
Here’s the catch, though: Silvergate shares are trading at around 47 times trailing 12-month earnings per share and around 21 times year-over-year expected earnings per share. This is a high price for a bank stock. And the valuation based on future expectations assumes the company continues to execute on its crypto strategy, including the launch of its stablecoin and crypto payments platform using Diem Association assets.
Nonetheless, for investors looking for exposure to the crypto industry, Silvergate Capital is likely to be a much more stable growth play than cryptocurrencies or crypto ETFs. Additionally, since it is a cash-generating business, there is a way to value an investment in Silvergate shares. Cryptocurrencies do not generate income or profits, and therefore the assessment of the merits of their purchase rests on more intangible factors.
That’s not to say that Silvergate Capital won’t be a volatile investment either. Still, if you think the digital economy has a long growth streak, put this stock on your watchlist.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Nicholas Rossolillo owns Bitcoin, Meta Platforms, Inc., and Silvergate Capital Corporation. Its clients may own the mentioned companies or cryptocurrencies. The Motley Fool owns and recommends Bitcoin and Meta Platforms, Inc. The Motley Fool recommends MicroStrategy and Silvergate Capital Corporation. The Motley Fool has a disclosure policy.