The crypto market is in a state of turmoil right now -- top cryptocurrencies like Bitcoin and Ethereum are down 64% and 67% year to date, respectively, and many altcoins are down even more. The bankruptcy of prominent crypto exchange FTX has added insult to injury. As such, it's no surprise that crypto-related stocks are also down big this year.
Silvergate Capital (SI -20.00%), a company that provides banking services to the crypto industry, is down 84% this year and a stunning 87% from its 52-week high. Silvergate was already down significantly this year, but the FTX debacle caused shares to fall even further as investors worried about contagion from FTX spreading throughout the industry. However, that hasn't stopped one billionaire investor from buying in.
Image source: Getty Images
What is Silvergate?
Silvergate is a regulated bank insured by the Federal Deposit Insurance Corp. that provides loans and other services to the cryptocurrency industry. Silvergate has more than 1,300 customers in the cryptocurrency and fintech industries. The company began as the deposit service provider and now its Silvergate Exchange Network (SEN) enables clients to settle crypto trades efficiently and cheaply. SEN allows for the real-time transfer of U.S. dollars between exchanges like Coinbase Global and investors. Many crypto exchanges, including Coinbase, Kraken, and Gemini, rely on Silvergate, making it a picks-and-shovels play on the growth of the cryptocurrency industry. The Silvergate Exchange Network has facilitated more than $1 trillion in payments since it began in 2017. Individual cryptos and exchanges may come and go, but Silvergate looks likely to maintain its role as a key cog within the industry. The San Diego-based company has a banking charter from the state of California and the fact that Silvergate is fully regulated and FDIC insured is a differentiator in an industry that has been roiled by scandals. As Silvergate itself says on its website, "Our solutions are built on our deep-rooted commitment and proprietary approach to regulatory compliance."
Who is Bill Miller?
According to recent 13F filings, Miller Value Partners, which is run by legendary value investor Bill Miller, initiated a position in Silvergate during the past quarter. Silvergate is Miller's largest new position, and seeing a well-known value investor like Miller buy in certainly gives the stock some additional credibility. Miller has a long track record of success in the world of investing, running Legg Mason, where his flagship fund beat the return of the S&P 500 every year for 15 years in a row between 1991 and 2005. Miller was one of the earliest institutional investors to embrace Bitcoin and to invest in it. He is a long-term investor who has said that "If you're going to get shaken out by how the stock trades in three months or six months or nine months, you probably shouldn't own it." So it is unsurprising that he has the stomach to handle the volatility of Bitcoin or a stock like Silvergate.
What does Miller see in Silvergate?
What does Miller see in Silvergate? For one thing, unlike many of the companies that rushed to go public to take advantage of soaring interest in cryptocurrency over the last two years, Silvergate is profitable, bringing in about $120 million in income last year. Between 2018 and 2021, the company increased revenue at an impressive 31.3% compound annual growth rate (CAGR). Not only is Silvergate profitable, but it also looks attractively valued at just 7 times earnings and 6 times forward earnings, putting it squarely in value stock territory.
The stock also trades at a price-to-book value of just 0.63. Book value is the sum of a company's assets minus its liabilities. Price-to-book ratio, which is often used when evaluating banking stocks, is calculated by dividing the company's market cap by this book value. A price-to-book value of less than 1 means that a company's stock is valued at less than the total value of its assets. Theoretically, it means that if Silvergate were to be liquidated, its assets would be worth considerably more than the stock is trading for today, giving investors a margin of safety when investing.
Miller forecasts that Silvergate will grow revenue at a 40% CAGR over the next two years, noting, "It is not often that Mr. Market allows the opportunity to invest in a business growing the top line at a 40% CAGR for the next two years, while it is trading at 13 times this year's earnings and eight times next." (Note that the stock has declined since Miller wrote the quarterly fund letter in which he said this, so the stocks' valuation is even cheaper now).
Ultimately, this is an investment for risk-tolerant investors, and the price can swing drastically based on the volatility of the crypto market. But as a profitable company trading at just 7 times earnings and at a significant discount to book value, investors who think that cryptocurrency is here to stay for the long term could do a lot worse than investing along side one of the top value investors of the modern era.
