What happened
Shares of Silvergate Capital (SI 2.50%) took on a dark patina on Monday. The crypto-friendly bank's stock was down by 7.5% as of 10:20 a.m. ET after a well-respected analyst firm downgraded Silvergate to the equivalent of a sell rating.
So what
In a Monday letter to investors, Morgan Stanley analyst Manan Gosalia lowered Silvergate's recommendation grade from equal weight to underweight, citing stress to the financial ecosystem around the crypto industry after November's FTX meltdown. As the only bank in Morgan Stanley's portfolio with an intentional focus on crypto, Silvergate is exposed to massive financial pressure in the aftermath of the FTX exchange's collapse and may become a target for litigation. Therefore, Gosalia argues that Silvergate investors should reduce their exposure to this stock until the crypto sector's elevated uncertainty has subsided.
Now what
I agree that the crypto market is subject to incredibly high levels of uncertainty and volatility right now. At the same time, Silvergate strikes me as one of the safest crypto bets amid the turmoil. The bank has been around since 1988, building a robust financial platform and decades of regulatory experience. Silvergate's Tier 1 leverage ratio -- an industry-specific metric that measures a bank's ability to withstand financial stress -- was 10.7% in the third quarter. That lands Silvergate among the top 15% of American banks by this vital metric.
The healthy leverage ratio and long-established regulatory compliance set Silvergate up to weather this crypto storm. If anything, I trust this robust financial service to come out stronger when the crisis fades out, while many less sturdy names with cryptocurrency exposure are likely to perish.
So I understand if Morgan Stanley wants to steer its clients away from cryptocurrency investments until the market stabilizes. However, I think treating Silvergate as a particularly high-risk investment is a mistake. Share prices are down by 86% over the last year and 69% in three months, and Silvergate trades at just 6.9 times trailing earnings today. In my view, Silvergate is an undervalued growth stock with extraordinary long-term prospects and a rock-solid financial foundation.
