Bitcoin (BTC -3.97%) is having a wild year. After about an 800% gain from the start of 2020 to March 2021, the original cryptocurrency has taken a breather with its value nearly cut in half.
The optimism surrounding bitcoin and cryptocurrencies in general is still promising, though, and governments, companies, and consumers alike are increasingly willing to accept and hold onto the digital currency. Three stocks that have bet on bitcoin and are worth buying right now are Square (SQ -5.11%), MercadoLibre (MELI -2.81%), and Silvergate Capital (SI -4.18%).
Square: A top fintech building a platform for the future
Bitcoin is exciting, but ultimately, it's a fixed asset -- it doesn't do anything by itself. It derives its value when someone does something with it, such as trade it, accept it as a form of payment, or use it to build a finance application (since bitcoin, like other cryptos, is really just software). On this front, Square is a leader in promoting bitcoin as a future player in the world of finance.
During its 2021 first-quarter update, Square said it owned just over 8,000 bitcoins, worth some $300 million at current market prices. That's a big bet, but still a minority share of Square's more than $5.0 billion in total liquidity.
CEO Jack Dorsey hasn't been shy about his digital payments company's bullish viewpoint on the crypto. Square sees bitcoin as the future of finance on the internet and is even considering building hardware-based wallets for consumers and merchants to store their digital assets on (versus at brokers like RobinHood or Coinbase). Dorsey is a controversial figure, but Square and its subsidiary Cash App have a massive following -- one that shouldn't be ignored.
At this point, all this talk of bitcoin as the future of finance is speculative. But for now, Square has used its digital asset position to become a top trading spot for many people via Cash App, and the coins can even be used as a method of payment with participating merchants on the Square platform. And once Cash App acquires a new user, it has a myriad of other services it can promote like stock trading, micro loans, tax prep, and of course basic digital banking.
Square's total revenue in the first quarter was up 44% year over year to $1.55 billion (or up 266% to $5.06 billion when adding in bitcoin), and the company is in the early stages of turning a profit (trailing 12-month free cash flow was only $16.2 million). This is a fast-growing financial services firm getting a huge lift from the crypto craze. I can't buy enough right now.
MercadoLibre: Using crypto to beat back inflation
MercadoLibre recently joined Square on the shortlist of companies that own bitcoin. The Latin American e-commerce leader revealed it purchased $7.8 million-worth in the first quarter as part of its "treasury strategy." It's unclear what MercadoLibre's next move will be, but my guess is it will buy more in subsequent quarters.
The reason has a lot to do with inflation. Many South and Central American countries in which MercadoLibre operates have been stuck in a highly inflationary environment for some time with prices of basic goods on the rise. Since bitcoin has a cap on the number of coins that can exist (just over 89% of the 21 million total cap have been mined so far), it serves as a type of "digital gold" that can appreciate in value over time if demand outpaces supply. In fact, many consumers in countries like Argentina have turned to crypto to protect their assets, and it seems MercadoLibre is doing the same.
To illustrate the problem, revenue was up 111% year-over-year in the first quarter to $1.38 billion, but growth jumped to 158% when excluding fluctuating currency conversion rates. As MercadoLibre grows and matures, these inflation effects that reduce its realized revenue and profits could be a real problem, one that could be partially fixed if bitcoin continues to rise in value (and if the company decides to convert more of its $2.4 billion in liquid assets into bitcoin).
For now, though, this retail and payments democratizer is outgrowing the issue. Active users reached 69.8 million last quarter (up from 43.2 million last year), the value of merchandise sold on its platform was $6.06 billion (nearly double the $3.41 billion last year), and free cash flow totaled $683 million over the last 12 months -- good for a respectable free-cash-flow margin of nearly 15%.
MercadoLibre trades for a hefty premium at 14 and 100 times trailing 12-month sales and free cash flow, respectively, as of this writing. But the company is spreading e-commerce throughout Latin America at a rapid pace, and there is no shortage of potential in the region as online shopping is still a tiny fraction of how people make purchases there. Bitcoin could eventually feature prominently in the company's overall strategy too. Give this digital retail and payments leader a close look.
Silvergate Capital: A top trading platform for crypto
Silvergate is getting huge traction with its crypto trading platform. This bank is a behind-the-scenes operator, though. Its Silvergate Exchange Network (SEN) helps a diverse list of customers like Coinbase and Binance trade and exchange cryptos by facilitating their exchange for U.S. dollars. As traders, investors, and institutions have increased their balance of bitcoin and other altcoins (and the number of Silvergate users has increased as well), the assets Silvergate has available to convert into interest-bearing loans have ballooned. Client digital currency balances increased to $6.8 billion in the first quarter, compared to just $1.8 billion a year prior.
As a result, Silvergate's net income (derived from interest income and banking fees) was $12.7 million during the quarter. By comparison, net income was only $9.1 million in the final quarter of 2020 and $4.4 million a year ago. Clearly, the bitcoin boom is equating to a boom for Silvergate and its SEN platform for institutions. Subsequent to the end of the first quarter, Silvergate raised $296 million in net cash via the sale of new stock to keep its foot on the gas.
This could be big for Silvergate, because it has another potentially big growth catalyst on its hands besides bitcoin. It was recently announced that Silvergate will be the exclusive issuer of Facebook's U.S. dollar-backed digital coin Diem. Facebook is close to rolling out its own blockchain-backed global digital payments platform, and given Facebook's social media empire has 2.85 billion monthly active users, suffice it to say Diem could be a big deal. Silvergate thus could be a far larger bank in a few years' time than it is now.
As of this writing, Silvergate stock trades for over 60 times earnings per share. That's a really high premium for a bank but not a totally unreasonable valuation if bitcoin prices and acceptance continue to rise over time. I think Silvergate Capital is the most speculative play on this list, and it will be a highly volatile stock. But given the enduring interest in bitcoin even after the recent tumble and the Facebook deal, it's worth considering a small position for investors that can tolerate the inevitably wild ups and downs.