Silvergate Capital Stock: a buy on the post-profit (SI) sale

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Silvergate Capital Corp (SI) has become a leader in financial services for the crypto industry. The stock was a huge winner, climbing over 800% over the past year, benefiting from the ongoing bull market in cryptocurrencies and growing digital asset ecosystems. This is a segment that has gained momentum, as evidenced by the price of Bitcoin approaching an all-time high after a long period of volatility in recent months. For Silvergate, the company just released its latest quarterly result that is beating expectations, highlighted by continued strong growth in the payment network and lending business. That said, stocks traded sharply lower on the report, which we believe is likely based on short-term technical profit-taking after a strong rally in recent weeks. We are bullish on the stock and see this correction as a buying opportunity for a high quality company with positive long term prospects.

Silvergate Share Capital

(Seeking Alpha)

Summary of corporate tax benefits

The company reported third quarter earnings with GAAP EPS of $ 0.88, $ 0.19 ahead of estimate. Revenue of $ 51.7 million also exceeded expectations, representing an increase of 126% from the third quarter of 2020. History has been the booming business environment since last year with a strong momentum in the main operational and financial measures. For context, although the company does not have direct exposure to cryptocurrencies on the balance sheet, it is understood that positive sentiment and increased exposure have increased transaction volumes for digital currencies as a wind. rear operational.

The heart of the business is the company’s Silvergate Exchange Network (SEN), recognized as an industry-leading payments network used by major crypto exchanges and institutional investors. The company ended the quarter with 1,305 digital currency customers, up from 928 in the third quarter of 2020 and 1,224 in the previous second quarter. Transfer volume on SEN reached $ 162 billion in the third quarter, from which Silvergate was able to generate $ 8.1 million in transaction fees.

Silvergate Capital - Growth Fueled by Powerful Network Effects

(Source: IR Company)

While amounts have increased significantly over the past year, transaction revenues have declined quarter over quarter. The key here is to recognize that the third quarter between July and September was defined by extreme volatility in the broader crypto market, as the price of Bitcoin corrected nearly 50% to its lowest. . Silvergate management notes a strong correlation between SEN dollar volumes and broader industry trends, which have generally moved based on sentiment and momentum. The good news is that in the fourth quarter, as Bitcoin and Ethereum prices rallied, transfer volumes and transaction revenues are also expected to rebound higher.

Trends in the crypto industry

(Source: IR Company)

Overall, financial results can be defined by a sense of resilience in the middle of the quarter weaker for the crypto in the third quarter. Even with a decline in transaction income and SEN usage in the quarter, both interest income and non-interest income were higher than in the second quarter. Net income of $ 23.5 million was 12% higher than the second quarter and 233% higher than the same period last year. Total on-balance sheet assets reached $ 12.8 billion, up 4% quarter-on-quarter with continued growth in customer deposits linked to digital currencies.

Silvergate Capital 3Q21 Financial Data

(Source: IR Company)

Keep in mind that beyond digital assets and crypto services, Silvergate maintains a diverse loan portfolio more like a traditional bank. Real estate is a segment in which the company has been active, including mortgage loans as well as individual residential and commercial real estate loans. The main benefit of Silvergate is its 0.0% effective cost of deposits based on the digital currency business, which represents a low cost source of funding that expands the business and increases profitability. This contrasts with a typical mid-sized commercial bank with a cost of deposit of between 0.75% and 1.25%.

SI Stock Forecast

There is a lot to like about Silvergate Capital with unique crypto exposure and well positioned to consolidate its leadership with the SEN payment network. Beyond the daily fluctuations in the price of Bitcoin and Ethereum, longer-term trends in the growing adoption of digital currencies as a payment method and the growing recognition of crypto as an alternative asset class will likely represent a positive fundamental tailwind for the company that will add to earnings and the upside of the stock. The latest positive development in the market is the launch of new Bitcoin ETFs which can likely help attract more capital into the segment, adding to the price dynamics.

Consensus estimates put the forecast for $ 166 million this year and EPS of $ 2.78, up 104% from 2020. Looking ahead, the market expects momentum to grow. growth continues with further revenue growth of 43% in 2022 and upwards of 31%. for EPS around $ 3.65. We believe these estimates could prove to be overly conservative, especially in an environment where Bitcoin’s crypto industry is “exploding” higher.

Silvergate Capital Consensus Revenue and EPS estimates

(Seeking Alpha)

From Q3 trends, it is clear that Silvergate’s operating and financial environment is sensitive to the underlying trade action and sentiment of major cryptocurrencies. While this represents a downside risk in a scenario where Bitcoin is trading sharply lower, we also expect Silvergate to outperform on the upside. The bullish argument for the title boils down to what the company calls the “network effects” of SEN which is capturing multiple areas of growth. Higher transfer volumes in payments can support lending and funding opportunities, with the business leveraging the platform for higher growth.

SEN network effects create multiple avenues for growth

(Source: IR Company)

In terms of valuation, SI trades as a growth stock par excellence given a forward P / E of around 57x. Based on consensus EPS estimates, the premium narrows through 2023 up to 30 times for fiscal 2023. Again, the highlight here is that the company is currently profitable and generating impressive growth. The leadership position and value of SEN as a fintech platform in our view justifies the bullish valuation.

There is not really a direct comparison between banks and Silvergate given its area of ​​activity. Within crypto-related financial services, we note Galaxy Digital Holdings Ltd (OTCPK: BRPHF), which we have already discussed, specializes more in asset management and investment banking for the industry. What we are seeing is that as the crypto market matures, larger established companies like Silvergate have a leading edge and can lead to the upside.

Is IS a buy, sell or hold?

Shares of Silvergate Capital have seen an incredible rally, rising from less than $ 100 to $ 175 between mid-September and last week. We feel the setup here was “buy the rumor, sell the news” in the Q3 earnings report with some technical profit taking. That being said, we believe this latest pullback may represent a new buying opportunity for high quality stock with broadly strong fundamentals.

We rate SI stocks as a buy with a one-year-ahead price target of $ 180, which is a 50x multiple of the current 2022 consensus EPS. In our opinion, the outlook for Silvergate and the broader crypto industry has never been so positive as the price of Bitcoin approaches a new all-time high. Tactically, the withdrawal here may result in a stronger base of support for the next higher stage. Once stocks calm down, the rally can continue. Longer term, the stock has even more potential as it increases in its valuation.

SL Action

(Seeking Alpha)

Recognizing the high volatility of Bitcoin and cryptocurrencies in general, SI remains exposed to changing market sentiment. A BTC sell below $ 50,000 would likely be a level that could put further downward selling pressure on the segment and lower SI shares. Another risk of note is the potential for regulatory efforts to limit the accessibility or legality of digital currencies, which would force a reassessment of Silvergate Capital’s long-term earnings outlook. Tracking points for the coming quarters include operating metrics such as transaction revenue and customer trends which we hope will be strong.

Sallie R. Loera