Cryptocurrency specialist Silvergate Capital (SI 27.89%) saw its stock appreciate more than any other bank in 2020, growing 367% last year. With the stock continuing to rise in 2021, Silvergate, a $5.6 billion asset bank based in La Jolla, California, has a huge valuation. But management and the market seem to feel good about that valuation after the company recently completed a common stock offering of $287.5 million, priced at $63 per share. The raise shows a lot of confidence in Silvergate and its business model.
A strong move by management
Issuing common stock can be tricky. Normally, investors do not like to hear that a company is issuing more common stock, because it results in share dilution. By bringing more shares into existence, the company must now divide its profits into more slices, resulting in lower earnings per share (EPS) for investors.
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However, if management is trying to raise capital, it makes sense for the company to do it at the highest share price possible. Pricing the offering at $63 per share with a book value of $15.18 per share, management went into the raise valuing itself at 4.15 times book value. This is impressive because in doing the raise, management essentially was able to convince investors that it was worth the high valuation -- most banks are usually valued at 1 or 2 times book value. It also shows that investors think the bank can continue to grow and provide adequate returns.
So far, the stock price has increased following the offering and continued to support the bank's valuation from before the raise. Silvergate expects the capital it is collecting from the raise to increase its book value from $15.18 to $22.96 per share. At Wednesday's close, the stock price had climbed significantly since the announcement of the offering and traded at $81.27 per share. This values the company at more than 3.5 times book value after the raise, which is still a very strong valuation, and the stock has been volatile.
Ultimately, if the new capital is invested wisely it could lead to higher profits and likely higher stock price appreciation for investors.
Strong momentum in the business
Silvergate saw strong momentum in 2020. A niche bank that went public in 2019, Silvergate caters to the cryptocurrency community and therefore has done well as digital assets like bitcoin have surged. The bank has built its own payments system called the Silvergate Exchange Network (SEN), a real-time payments network that can clear transactions in U.S. dollars instantly around the clock, 365 days a year, between two users in the network. This is ideal for institutional crypto traders and crypto exchanges because cryptocurrencies trade around the clock.
At the end of 2020, SEN had 76 crypto exchanges and more than 600 institutional investors on the network. And the larger the network gets, the more attractive it becomes for other customers to join because there are more people to interact with on it. SEN helps bring in non-interest bearing deposits that it doesn't have to pay any interest on, and fee income from all the transactions.
In the fourth quarter, there were a record 90,000-plus transactions conducted on SEN for a total volume of $59 billion. That's a roughly 530% increase on transactions compared to the fourth quarter of 2019. In the fourth quarter, the bank reported $0.47 diluted earnings per share, up 29% from the third quarter of 2020 and more than 150% from the fourth quarter of 2019.
Silvergate said in its offering prospectus that it intends to use the proceeds from the common stock raise to further support capital levels by supporting the company's growth organically or inorganically through acquisition. The company is rolling out new products and seeing some nice growth. In the fourth quarter, Silvergate's SEN leverage product, which is a line of credit in U.S. dollars collateralized by bitcoin, exited pilot mode and jumped from $35.5 million in total volume to $82.5 million. The company also rolled out a bitcoin custody solution, and said that launching new products is key to its strategy.
Confidence in the company
It's a strong sign of investors' confidence to see the stock jump after Silvergate's issuance of common stock, as more times than not investors sell shares upon the news. The future certainly looks bright for the company as it continues to add more institutional investors to SEN, and launches more products to leverage among its customer base. Overall, management at the bank made a smart move by raising equity at the high valuation and increasing book value, showing how much confidence it has in its business.
