A Gift From the FTX Fallout?

The collapse of crypto firm FTX may go down as the largest financial scandal in history. 

While it’s mainly impacted the crypto world, the damage has spread beyond the crypto bros. 

Silvergate Capital (SI), a leading provider of financial infrastructure solutions to the digital asset industry, is under intense scrutiny after the collapse of FTX, one of its customers.

This caught our attention thanks to data from Trackstar, our proprietary sentiment indicator.

As the table above highlights, financial pros’ searches for Silvergate far outstripped those for any other crypto financial services stock.

And recently, the average search volume rose from 50 a day to nearly 100.

So it’s worth seeing what’s going on with this stock down over 85% year to date.

Silvergate Capital’s Business

Silvergate’s platform, the Silvergate Exchange Network (SEN), provides payment, lending, and funding solutions to digital currency companies and investors. 

SEN enables digital-currency and institutional investors to send U.S. dollars and euros 24/7, 365 days a year, between their Silvergate accounts and the accounts of other Silvergate clients. 

The firm also has a service called SEN Leverage. It offers secure, institutional-grade access to capital through U.S.-dollar loans collateralized by bitcoin. 

Silvergate also offers traditional financial services, including commercial banking, commercial and residential real estate lending, mortgage warehouse lending, and commercial business lending. 

Shares of SI are down more than 56% over the last month. The fallout of firms like FTX and BlockFi has raised concerns about Silvergate’s business practices. 

Silvergate’s total deposits from all digital asset customers totaled $11.9 billion. FTX represented less than 10%. 

While Silvergate has no outstanding loans or investments in FTX, it concerns investors given all the volatility in crypto and uncertainty surrounding crypto firms. 

There’s speculation that FTX received some customer deposits via Alameda accounts at Silvergate. Moreover, U.S. senators are now asking Silvergate for records on improper transfers. 

Morgan Stanley believes a pickup in outflows will impact Silvergate’s margins and net interest income. The 10 largest depositors account for roughly 45% of Silvergate’s total deposits. 

Financials

Source: Stock Analysis

Silvergate’s revenue spiked enormously in 2021, going from $90.8 million in 2020 to $174.5 million. 

Over the last 12 months, it made $281.3 million. More impressive, its net income jumped from $26 million in 2020 to $78.5 million in 2021. Its net income for Q3 this year was $43.3 million, compared to $23.5 million for Q3 2021. 

The company’s average digital asset customer deposits were $12 billion during Q3 2022, compared to $13.8 billion during Q2 2022. That’s not bad considering how much crypto prices have dropped over the last year. 

Based on its latest quarterly earnings report, the firm had $2 billion in cash and $780 million in debt. 

While it appears stable financially, as we noted, it’s suffering from a crisis in confidence due to its relationship with FTX and Alameda. 

Valuation

Source: Seeking Alpha

SI trades at a P/E GAAP ratio of 5.6x, which is in line with some other financial services companies catering to crypto. 

For example, Provident Bancorp (PVBC) is at 5.9x, and Signature Bank (SBNY) is at 5.7x. However, Customers Bancorp (CUBI) is at 3.4x, and Metropolitan Bank (MCB) is at 7.3x.

Since its IPO in 2020, SI has traded at an average price-to-book ratio of 2.7x. It’s significantly lower now, 0.53x. That’s nearly identical to PVBC’s 0.5x, but notably lower than SBNY at 0.95x, CUBI at 0.77x, and MCB at 1.05x. 

Profitability

Source: Seeking Alpha

SI made $43.3 million in net income during Q3 2022, a nice pop from Q3 2021, when it made $23.5 million. 

The company’s net income margin is an impressive 46.4%. Only SBNY is higher at 51.5%. But SI is considerably higher than PVBC at 27.6%, CUBI at 44.2%, and MCB at 37.5%. 

In addition, Silvergate boasts a strong return on equity of 10.8%, which is higher than PVBC at 8.4%, but trails SBNY at 17%, CUBI at 22.5%, and MCB at 15.3%. 

Growth

Source: Seeking Alpha

SI had 1,677 digital asset customers on September 30, 2022, compared to 1,585 on June 30, 2022, and 1,305 on September 30, 2021. That’s not bad, considering how cryptocurrencies have gotten beaten up this year. 

But SI now faces greater challenges, with the collapse of FTX further shaking investors’ confidence in the crypto space. 

The company’s revenues grew 85.2% YoY, considerably more than other financial services firms that deal with crypto. For example, PVBC grew revenues 22.1%, SBNY 43.2%, CUBI -0.3%, and MCB 42.6%. 

Our Opinion 7/10

It appears SI and its shareholders are getting punished because FTX was a customer. 

But it doesn’t seem like SI did anything wrong, and like many others, FTX fooled it. 

While the entire crypto space is on shaky ground right now, this could very well be a buying opportunity in SI. 

With shares down more than 85%, it’s probably worth a shot to make a small investment here, although it’s highly speculative.