Growth stocks in the tech sector have been all the rage up until recently, when fears of inflation and potential rate hikes have started to spook investors. That's because many high-flying tech stocks were already trading at huge valuations, and when rates rise, investors seek higher returns, because all of a sudden safer assets like U.S. Treasury bills yield more.
With the threat of inflation and rising rates to follow, investors have begun to rotate out of tech, putting growth on hold for many tech stocks. But if you are still looking for the thrill of growth as the market sails into more turbulent inflationary waters, here are two tech-related stocks that I think can still perform well in a rising-rate environment.
1. Silvergate Capital
A small bank with roughly $7 billion in assets, Silvergate Capital (SI -1.88%) built its own real-time payments system called the Silvergate Exchange Network (SEN), which is ideal for institutional traders and exchanges looking to interact and trade cryptocurrencies. The unique platform is one of the main reasons that shares of Silvergate rose from less than $15 per share in early October 2020 to $106.21 per share at Wednesday's close. Silvergate does trade at a very high valuation, whether you look at it from a price-to-earnings standpoint (a multiple over 62) or value the bank from a price-to-tangible book basis (almost 3.7). But there is tremendous untapped potential in Silvergate's balance sheet.
Remember, Silvergate is still a bank, so even though its technology and its ability to service crypto traders form its main competitive advantage, it still gathers deposits, makes loans, and buys securities. By banking crypto traders and exchanges, Silvergate is able to pull in large amounts of cheap deposits. Many loans tend to be tied in some way to interest rates, so when interest rates go up, ideally Silvergate's deposit costs will remain low, while the yield on loans and securities rises, increasing the bank's profit margins. Silvergate, in a regulatory filing for the quarter ending March 31, disclosed that if the Federal Reserve were to raise its federal funds rate by 1 percentage point, net interest income would shoot up a staggering 63% over the next 12 months.
Additionally, Silvergate only has a loan-to-deposit ratio of roughly 23%, meaning it has only deployed about 23% of its deposits into loans, an extremely low amount. If the huge economic growth that economists are currently projecting occurs and Silvergate is able to increase its loan production, that's another way the bank could boost earnings significantly.
While Silvergate is a tech play, it has some of the traditional dynamics of a bank baked in as well, and banks tend to be more of a hedge against inflation than tech stocks, so the stock should be able to fare better in a rising-rate environment.
LendingClub (LC 0.90%) is another company that combines the concept of a tech company and a bank into one. The company recently became one of the first fintechs to secure a bank charter, which has dramatically altered its business model. LendingClub's national digital bank originates personal loans and uses 148 billion cells of data to make informed decisions on approving borrowers and determining loan loss rates.
Earlier this year, LendingClub obtained a bank charter through its acquisition of the Boston-based Radius Bank, giving the company access to deposits that are much cheaper and more stable than the warehouse lines of funding the bank used to originate loans with. Additionally, the bank has now moved to a model where it plans to retain anywhere from 15% to 25% of loans on its balance sheet and collect interest income on those loans. Prior to obtaining the bank charter, LendingClub sold most of its loans into the secondary market for a fee. LendingClub disclosed in its most recent quarterly filing that its balance sheet is asset sensitive, meaning more of its assets will reprice higher than its liabilities when rates increase, which is why rising interest rates can benefit earnings.
LendingClub has actually not been a growth stock yet, but I believe this will soon change because of the earnings power in the new company. This presents a great opportunity, in my opinion, because unlike many other tech growth stocks, LendingClub is not trading at a rich valuation. While most analysts don't expect the bank to be profitable until next year, LendingClub looks cheap on a price-to-sales basis. Trading at a market cap of roughly $1.6 billion as of Wednesday's close, the company only trades at a little more than 3 times sales based on consensus revenue estimates for this year, and a little more than 2 times consensus revenue estimates in 2022.