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Cryptocurrency investors have made money hand over fist in the last two years, given the widespread adoption of digital assets. Now viewed as an alternate class, the cryptocurrency space recently touched a market cap of $3 trillion. If you remain bullish on the long-term prospects of cryptocurrencies, it makes sense to place your bets on Silvergate Capital (NYSE: SI).
A company valued at a market cap of $4.5 billion, Silvergate Capital provides a wide range of financial infrastructure solutions and services. It has developed these solutions for several cryptocurrency exchanges all over the world.
The bull case for Silvergate Capital
Silvergate Capital has built a real-time payments system which is known as the SEN or the Silvergate Exchange System. This platform allows parties on this network to send or receive large payment transactions. These transactions can be sent anytime and are cleared on a real-time basis, making the platform extremely advantageous for cryptocurrency market participants that include institutional traders and exchanges.
Silvergate was in fact the first bank to provide this service and the SEN has onboarded 1,300 customers by the end of Q3. The SEN in fact allows Silvergate to accumulate deposits without having to pay interest to customers. The company also issues traders with a line of credit by collateralizing Bitcoin.
Silvergate counts major exchanges such as Coinbase (NASDAQ: COIN) and Binance as its customers. This has allowed Silvergate to increase cryptocurrency deposits by 500% in the last two years.
In Q3 of 2021, the SEN handled $162 billion in the total transactions which was an increase of 346% year over year. However, it was 32% lower compared to Q2 of this year. Further, Silvergate also reported $8.1 million in transaction sales during Q3 which is basically the fee income earned from cryptocurrency customers. Transaction revenue more than doubled year over year but fell from $11.3 million in the June quarter of 2021.
The company’s transaction volumes are dependent on cryptocurrencies such as Bitcoin and Ethereum. The trading volumes of the two largest cryptocurrencies fell by around 40% in Q3 which impacted the transaction volume of Silvergate Capital in the quarter.
What next for SI stock investors?
Silvergate Capital has increased revenue from $44 million in 2017 to $88.8 million in 2020. Analysts tracking the stock expect the company to increase sales by 93.3% to $177 million in 2021 and by 42.5% to $252.25 million in 2022. Its adjusted earnings per share is forecast to increase from $1.36 in 2020 to $3.58 in 2022.
We can see that SI stock is valued at a forward price to sales multiple of 17.8x and a price to earnings multiple of 41x which might seem expensive. However, a growth stock commands a premium, and Silvergate Capital remains part of a rapidly expanding market making it a top bet for long-term investors.
Silvergate Capital stock has gained over 1,000% in the last two years but it’s also down 34% from all-time highs, allowing you to buy the dip.
The company’s CEO explained, “Silvergate had another great quarter, underscored by record quarterly pre-tax income, continued platform growth, and an expanding balance sheet. In the third quarter we grew average digital currency deposits to $11.2 billion, the highest in our history, added new digital currency customers to the SEN, and further increased SEN Leverage commitments and balances. Our strong results and increasingly diverse earnings stream highlight the important roles that we play in serving our customers in the still nascent digital currency industry.”
Analysts tracking Silvergate stock have a 12-month average price target of $201 which is 40% above its current trading price.
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