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Shares of the crypto bank Silvergate Capital (NYSE:SI) is now at $100.77 at last night’s close (8 July 2021).
Millionaire-maker Silvergate … start your engines
With just $2.65 billion market capitalisation (as of 9 July 2021), Silvergate is a small player as compared to giants like Square, PayPal, or Coinbase. This means that it has a huge runway and with time, it will grow into the 100 ton gorilla in the room.
As an investor, what you really want to know is how Silvergate Capital makes money. This is the most important part of the equation because after all, it is a bank. Here are some of its sources of income.
Silvergate Exchange Network (SEN) Leverage. This is a a collateralized lending product where institutional investors “receive US dollar financing by entering into a loan agreement with Silvergate”. This level of funding is collateralised by Bitcoin which is Silvergate’s key strategy.
Loans. It is a bank, so this is the main cash cow just like any other bank. It uses its position as a custodian of digital assets, and loans them out as collateral, collecting interest income in the process.
Transaction fees. As an issuer of stablecoins, there will be the opportunity of accruing transaction fees through massive volumes over its network.
ANALYSIS
Let’s look at some statistics to ensure that for those of us who are interested to have a piece of this deliciously designed business, we enter at the RIGHT price.
Silvergate Cap vs JP Morgan
Price/Book (mrq) 3.50 vs 1.83
Verdict: If you buy it at this current price, you are paying twice of what you are paying for JP Morgan, which is already in and of itself, very expensive. For JP Morgan, you are paying 83% above its book value. For Silvergate, you are paying 250% more. That does not sound like a good deal to me, no matter how attractive this offering is. This also means in any correction, this valuation is bound to go fall harder, and presents me the space to enter.
Profitability
Profit Margin 33.73% vs 34.24%
Operating Margin (ttm) 41.40% vs 42.91%
Verdict: They are profitable and close to what one of the best banks, JP Morgan, is doing.
Management Effectiveness
Return on Assets (ttm) 0.68% vs 1.19%
Return on Equity (ttm) 7.17% vs 14.97%
Verdict: It is only half as effective as JP Morgan. As an investor, I will do my due diligence to see if the management is good at handling things. After all they are managing assets.
ACROSS THE BOARD YEAR-ON-YEAR GROWTH. Look alright, in percentage terms
GROWING NEGATIVE FREE CASH FLOW - SCARY
VERDICT
As an investor, doing a #FOMO for this bank is not the way to go. The price is too steep at the moment and it has great room for valuations to fall by half to be close to or at least match JP Morgan. Again, nothing wrong with the bank. It is just that its fundamentals at the moment like its GROWING negative cash flow and less effective management as compared to JP Morgan are not good signs.
I will be watching this business for the next few quarters and provide an update as we go along.
Stay tuned!
(*As again, this does not constitute investment advice. Please do your own due diligence before investing.)
Yours,
Chief Editor,
BBA Market Perspectives
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