Why Silvergate Capital Missed Estimates in its Q4 Earnings Report

Silvergate Capital (SI 2.50%), a bank focused on cryptocurrencies, continues to grow, but the company posted weak results in its recent quarter.

In this episode of "Beat and Raise" recorded on Jan. 21, Fool.com contributors Connor Allen and Brian Withers discuss the good and the bad in the company's fourth-quarter earnings report and what to expect from Silvergate going forward.

Brian Withers: Hey Connor, we're going to talk about Silvergate Capital. This is like a bank that got into crypto back in 2013. They did.

Connor Allen: They did not have a great quarter, Brian. They did not have a great quarter at all. Shares are down nine percent since they reported. Let me go ahead and pull this up. But before I go into specifically about what the earnings were like, I just want to hit on the company because not a lot of people know what Silvergate does. They're not your typical bank that you would look at. They work as a conventional bank that lashed itself to crypto. That is what they do. They focus on giving crypto back to deposits and making loans to people so that they can buy more crypto. The way that this works is they will loan out US dollars to a customer if they have Bitcoin at all for that loan, and they are one of the only banks, if not the only bank, that does this. I believe they might be the only one that does that.

I'm not talking about you and me, Brian, I'm not talking about us going to Silvergate and getting a loan for our Bitcoin that we own or dozens that both own, but I'm talking more like Coinbase, I'm talking Square and PayPal. Those are the customers that Silvergate has that use Bitcoin as collateral. So obviously, most companies in this space are very volatile. There's no difference between Silvergate and any other company in this space. I was looking at the chart. I had Ycharts up and looking at their price versus the price of Grayscale Bitcoin Trust, pretty much directly follows Bitcoin, and it's almost like a leveraged play on Bitcoin because when Bitcoin's price goes up a little bit, Silvergate's goes up a lot, and when it's down a little bit, Silvergate's goes down a lot. It's been very lucrative when Bitcoin is going up, but really painful when it's going down and that's the way that their stock price goes. But let's go ahead and hit on the quarter that they had.

Brian Withers: Just one more piece. They are not just tied to Bitcoin, they do an exchange for all sorts of crypto.

Connor Allen: They do. Bitcoin is just the main one that is used as collateral. If I were to pull up that chart and choose Ethereum or choose Solana, all cryptos typically run together. It's not really Bitcoin, it's just the crypto space in general. Pretty correlated to that area, but let's go ahead and hit on earnings. Revenue missed expectations by eight percent and reached $49 million.

Brian Withers: You moved the slide forward. Just hit it up or left.

Connor Allen: Sorry.

Brian Withers: There you go.

Connor Allen: Earnings missed, they reached 66 cents per share and they missed by over nine percent. The company gives no outlook for future earnings and I don't think they ever have given outlook for future earnings as far as I know, and I think the reason for that is because they know the industry they are in, they know how many variables it is and it would just be dumb for them to try to estimate what the next quarter or year is going to be like. They don't give any outlook here, but as far as some highlights is that they had $787 billion in SEN transfers, which is their Silvergate Exchange Network, and this allows customers to send and receive US dollars 24/7 365. That was a big increase there. They also on-boarded over 400 new customers. That number might seem small, but we're talking about institutional customers, we're not talking about individual people. Customers, which brings their total customer count to 1,381.

They also had what I would consider a safe year, further proving their crypto lending concept with zero forced liquidations in their SEN leverage segment. This is what I was talking about earlier providing US dollar with Bitcoin or crypto as collateral. The fact that there's no forced liquidations, it's giving that proof-of-concept. Obviously, we're still in the beginning stages of this thing, so we have yet to see what's going to happen. But one thing I just want to talk about is how interesting this company is with using crypto as collateral because crypto can be sold and bought at any time of day, anytime of the week. If you're talking about mortgage-backed, like if you're talking about a bank that uses mortgages as the collateral in certain types of loans, you can't just go and sell a house on the open market anytime you want, but with Bitcoin, they really can. They can create some algos that will sell it, putting stop losses and stuff like that to where it seems like it's a relatively safe way to do it.

I know it's probably not, but just first glance, looking at this thing, it seems smart, instead of having collateral attached in a really restricted asset that's hard to sell. That was just one thing interesting, but one concern, I hit on this already, is that you're going to experience volatility if you're a shareholder of the stock and is pretty much tied to Bitcoin, tied to crypto in general, and so just expect that if you're thinking about investing in this company. I also will just say for analysts' expectations, they missed on revenue and earnings per share, but this company is so difficult to predict. The analyst's job, I feel for the analysts trying to cover this company because it can be really difficult to get those estimates out there and get them correct because Silvergate has missed their earnings expectations in three out of the last four quarters. I don't know if that's certainly about Silvergate or just more about the difficulty of trying to predict what this company is going to do.

Brian Withers: It's interesting, I'm just looking at some numbers here. The $787 billion in transfers. They process that many billions of revenue in cryptocurrency, but the revenue from that is just a tiny, tiny fraction. I would've thought they might have had pricing power and a little more leverage, but I guess they're only making a couple of pennies or fractions of a cent on each transaction.

Connor Allen: They do. I guess it's great to see that they have that many transfers because you can always utilize it. I feel like it might be harder to get transfer volume up, more so than monetizing it. I may be wrong, it may be flipped, but maybe they can monetize that better in the future.

Brian Withers: Awesome. Well, I appreciate the update. This is a recent rec out there in the Backstage universe and we'll continue to follow it.