SI: Silvergate vs. Canaan: Which Cryptocurrency Stock is a Better Buy?

Silvergate Capital Corporation (SI) and Canaan Inc. (CAN) are two of the leading operators in the fintech and cryptocurrency industry. SI provides cash management services for digital currency-related businesses. It also offers banking products and services to business and individual clients in the U. S. and internationally. CAN is engaged in the sale of integrated circuit (IC) final system products for bitcoin mining and related components primarily in the People’s Republic of China.

As the world is driven future into the digital realm by the COVID-19 pandemic, cryptocurrencies could experience a rally like 2017, when they came close to breaking the $20,000 mark.

The most popular cryptocurrency, bitcoin, began 2021 strongly, breaking the $30,000 level after gaining significantly in 2020. On the 12th anniversary of the bitcoin’s creation (Jan.3) , the cryptocurrency hit its all-time high of more than $34,800. With cryptocurrencies moving steadily closer becoming a mainstream payment method, we think SI and CAN have the potential to surge substantially in the upcoming quarters.

In terms of past six-month stock price performance, SI is the clear winner with 411.2% gains versus CAN’s 217.9% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

On November 5, SI announced the hire of Jonathan Melton as director of digital asset lending. His role will help lead the expansion of the company’s SEN Leverage product. SI has also recently achieved $100 billion in transfer volumes across its Silvergate Exchange Network. The major milestone further validates the platform’s competitive advantage and its growing network.

Earlier last year, CAN announced that the company may repurchase up to $10 million of outstanding American depositary shares and Class A ordinary shares over the next 12 months, beginning September 2020. The company intends to fund the repurchases from its existing cash balance.

Recent Financial Results

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In the third quarter ended September 30, 2020, SI’s net income surged 6.1% year-over-year to $7.10 million, due primarily to an increase in its digital currency customers. The company’s EPS grew 2.8% from the year-ago value to $0.37.

SI’s SEN handled transactions increased 455% from the prior-year quarter to 68,361, while SEN handled dollar transfers rose 252% year-over-year to $36.70 billion over this period. The company’s digital currency customer related fee income grew 106.3% from the year-ago value to $3.30 million.

In comparison, CAN’s revenue declined 75.7% year-over-year to RMB163.0 million for the third quarter ended September 30, 2020. The decrease was due mainly to decreases in total computing power sold and average selling price per Thash/s. The company’s services revenue increased 164.9% sequentially to RMB151 thousand. CAN reported a net loss of RMB86.4 million over this period.

Here SI is in an advantageous position.

Profitability

CAN’s trailing-12-month revenue is 1.57 times SI’s. However, SI’s ROE and ROA of 7.98% and 0.9%, respectively, compare favorably with CAN’s negative values.

Valuation

In terms of trailing-12-month Price/Sales, SI is currently trading at 15.44x, 102.1% more expensive than CAN, which is currently trading at 7.64x. But CAN’s trailing-12-month Price-to-Book of 12.40x is 176.2% higher than SI’s 4.49x.

POWR Ratings

SI is rated “Strong Buy” in our proprietary POWR Ratings system, while CAN is rated “Neutral”. Here are how the four components of overall POWR Rating are graded for TSM and INTC:

SI has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “C” for Industry Rank. In the 53-stock Pacific Regional Banks industry, it is ranked #8.

CAN has an “A” for Industry Rank, a “C” for Trade Grade and Buy & Hold Grade, and a “D” for Peer Grade. It is ranked #23 out of 43 stocks in the Technology – Hardware industry.

The Winner

While both SI and CAN are good long-term investments considering their continued business expansion and wider cryptocurrency adoption, SI appears to be a better buy based on the factors discussed here. Its superior financials against the backdrop of an accelerating shift toward cryptocurrency by both institutional and retail investors should, we think, help it perform better than CAN.

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SI shares were trading at $73.27 per share on Thursday afternoon, up $5.03 (+7.37%). Year-to-date, SI has declined -1.40%, versus a 1.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...