What to expect in Silvergate Capital’s upcoming earnings report

The crypto bank Silvergate Capital (NYSE:IF) has seen volatility over the past two months, peaking at $222 per share in early November and then dropping to around $135 earlier this week. Since its IPO in late 2019, however, the stock is still up around 850%.

The company plans to release fourth quarter and full year 2021 results before market open on Tuesday, January 18. With such volatility lately, let’s take a look at what to expect from Silvergate’s upcoming earnings report.

The Silvergate Exchange Network

Silvergate’s business model is powered by the bank’s Silvergate Exchange Network (SEN), a proprietary real-time payments network that facilitates trade between institutional investors and crypto exchanges. The network already has over 1,300 customers, who bring in large amounts of deposits that require no interest payments from Silvergate. SEN fuels the entire business model, not only providing deposits, but also generating commission income as customers use other traditional banking products. Silvergate is also able to create niche lines of credit secured by Bitcoin to clients on SEN, a service called SEN Leverage.

During Silvergate’s Q3 earnings call, management confirmed that volume on SEN is highly correlated to Bitcoin and Ethereum spot trading volume. If you look at overall spot trading volume on major crypto exchanges over the past few months, it shows that volume in the last three months of 2021 was not as high as some previous months in 2021, but is expected to still be higher than the volume of the third quarter. .

Image source: CryptoCompare

Given that SEN volume was $162 billion in Q3 2021 and nearly $240 billion in Q2, I think it’s fair to assume that we’ll see volume on SEN somewhere between those two digits. Given that spot crypto trading volume appears closer to Q3 volume than Q2, I believe a more accurate window for Q4 volume for SEN is between $160B and $200B.

One variable that could affect my expected range is if a large number of new clients have recently started trading more on the network. Also, fee revenue from SEN customers has so far followed the trend of SEN usage, so I expect this number in Q4 to be between Q2 and Q3 numbers for fee income, which was $11.3 million and $8.1. million, respectively.

Silvergate Exchange Network Q3 2021 statistics.

Image source: Silvergate Capital Q3 Investor Presentation.

SEN leveraged loans have only been available for a few quarters, so these volumes are likely to continue to increase. The deposit story is more difficult to predict because although SEN volume declined in Q3, average deposit balances increased, but not at the same rate as in previous quarters of 2021. On last call to the company’s results, chief executive Alan Lane said there’s a lag between when customers are added to SEN and when they add their funds, so it may take a few quarters before the full amount of their deposit arrives on SEN. Lane also hinted that he thinks deposits will increase from current levels. Deposit growth is important because the more deposits there are, the more money Silvergate can deploy into loans or securities and earn a return.

The Big Question of Earnings

Analysts on average expect Silvergate to generate earnings per share (EPS) of $0.71 for the fourth quarter of 2021 on revenue of $53.4 million. For the full year, analysts on average expect EPS of $2.95 on revenue of $177.4 million. Since its IPO, Silvergate hasn’t missed EPS or revenue in seven quarters. Given that spot crypto trading volumes trended better in Q4, I expect a beat. But the big question that will likely preoccupy investors and analysts concerns the bank’s Diem stablecoin initiatives.

Last year, Silvergate announced a successful partnership with Metaplatforms (formerly Facebook) to be the company’s exclusive issuer of the dollar-pegged stablecoin. Given Meta’s 2.8 billion global audience, the addressable market is huge. During last quarter’s earnings call, Lane said Silvergate would make money on this partnership through transaction fees when stablecoins are minted and burned, through interest on Diem-indexed reserve deposits and by selling other banking products to new customers.

But the project has not yet been launched, to my knowledge. Before presenting the pilot, Lane said Silvergate was still waiting for the President’s Financial Markets Task Force to release its recommendations for stablecoins.

The group published this document at the beginning of November. On the one hand, I found it positive because it recommended that stablecoins be issued by licensed banks like Silvergate. On the other hand, as pointed out by Wedbush analyst David Chiaverini, the President’s Task Force said that there “should be limits on affiliation with commercial entities” for stablecoin issuers. . While this is just a recommendation, I believe it is a reference to a partnership between a stablecoin issuer like Silvergate and a commercial entity like Meta. In other words, if this recommendation were to go into effect, it could limit the scope of Silvergate’s partnership with Meta, but it’s really unclear at this time to what extent. Chiaverini also noted that the United States is very likely to create its own digital currency, which could reduce the size of Diem’s ​​market. Competitors like PayPal are also launching stablecoins.

I’m excited about Diem, but also nervous. Meta has been trying to make a stablecoin for some time and has yet to get it off the ground. I certainly hope that Silvergate management will answer stablecoins related questions during the earnings call. The best case scenario (and what would probably be good for stock) is for the company to tell us that the pilot has been released or will be released imminently.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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