Shares of cryptocurrency banking platform Silvergate Capital (SI -6.67%) have been beaten down as of late. The Federal Reserve is raising interest rates, and recent comments from Fed officials indicate tighter monetary policy could be on the way in an effort to beat back inflation. Cryptocurrency prices are in retreat, and Silvergate stock along with it, as higher interest rates lower the present value of risk assets.
However, Silvergate Capital has a lot of good things going for it right now in the burgeoning crypto space. Is this stock a good long-term buy?
More than a play on crypto prices
Cryptocurrencies and digital assets in general are highly volatile when it comes to daily price swings. However, Silvergate's revenue generation doesn't rely on crypto prices staying high. Its Silvergate Exchange Network (SEN) facilitates money transfers for crypto market exchanges, traders, and institutions. Thus, it's the activity level in the crypto universe that matters more than crypto prices.
This is illustrated in the fourth-quarter 2021 report. Cryptocurrencies boomed, then crashed in the final months of the year (on mounting rhetoric noted above on interest rates). But SEN reported healthy gains anyway, handling $219 billion in money transfers in the fourth quarter -- a 35% increase compared to the previous quarter, and a 270% increase compared to the year-ago period. As a result, Silvergate said its total net income was $21.4 million compared to just $9.1 million in the fourth quarter of 2020.
A good risk-reward investment?
Subsequent to its fourth-quarter 2021 update, Silvergate said it acquired assets from the Diem Association, the crypto project formerly headed up by Meta Platforms (NASDAQ: FB) (parent of Facebook, Instagram, and WhatsApp). Silvergate expects to launch a stablecoin later this year with these assets.
Additionally, the company has issued a steady stream of newsworthy headlines in recent months. It expanded SEN to include money transfers in euros, and issued a $205 million Bitcoin (CRYPTO: BTC) collateralized loan to a MicroStrategy (NASDAQ: MSTR) subsidiary. Clearly this crypto bank is riding strong momentum with its platform for digital money movement.
Here's the rub, though: Silvergate stock trades for about 47 times trailing-12-month earnings per share, and about 21 times one-year forward expected earnings per share. That's a steep price tag for a bank stock. And the valuation based on future expectations assumes the company continues to execute on its crypto strategy, including the launch of its stablecoin and crypto payments platform using assets from Diem Association.
Nevertheless, for investors looking for exposure to the crypto industry, Silvergate Capital is likely to be a much more stable growth play than cryptocurrencies or crypto ETFs. Plus, given this is a cash-generating business, there's a way to value an investment in Silvergate stock. Cryptocurrencies don't generate revenue or profit, and thus valuing the merits of buying them relies on more intangible factors.
That's not to say Silvergate Capital won't be a volatile investment, too. Nevertheless, if you think the digital economy has a long runway of growth, put this stock on your watch list.