Leading lender to major crypto firms Silvergate Capital Corporation’s (SI) stock plunged sharply after the company announced that it would wind down operations and liquidate its subsidiary Silvergate Bank, citing “recent industry and regulatory developments.” This announcement comes after the news that SI requested more time to file its annual financial report.

With SI facing exacerbating liquidity and regulatory challenges, investors are increasingly betting against the stock. With extremely high short interest levels, let’s find out if SI has joined the meme stock club.

With a $45.27 million market cap, SI is the provider of innovative financial infrastructure solutions to the digital asset industry. By the end of 2022, the digital asset industry experienced a transformational shift, with significant over-leverage in the industry, leading to several high-profile bankruptcies.

Investors placed bearish bets on this fundamentally weak crypto-related stock, with nearly 77% of SI’s shares sold short. The stock’s astronomically high short interest opens a real possibility for a short squeeze.

Last Wednesday, SI, a central lender to the crypto industry, said it is winding down operations and liquidating its bank considering recent industry and regulatory developments. The company’s shutdown and liquidation plan includes full repayment of all deposits. Centerview Partners will act as SI’s financial advisor, and Cravath, Swaine & Moore will provide legal services.

This liquidation announcement comes less than a week after the company made a “risk-based decision” to discontinue its real-time payments platform, Silvergate Exchange Network, or SEN, considered one of its core offerings.

On March 17, 2023, SI received a letter from the New York Stock Exchange (NYSE) notifying the company that it is not in compliance with the NYSE’s continued listing standards given that it failed to timely file its Annual Report on Form 10-K for the year ended December 31, 2022. The company disclosed that the delayed filing was partly due to an imminent regulatory crackdown.

SI also attributed the delay to Congressional inquiries and investigations from its banking regulators.

On January 27, SI announced that the company had suspended the payment of dividends on its 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, to preserve capital as it navigates recent volatility in the digital asset industry.

In addition to laying off 40% of its workforce in January, the company reported a $1 billion loss in the fourth quarter of 2022, as investors frantically withdrew their deposits in the wake of FTX’s bankruptcy.

Recent uncertainty surrounding SI prompted crypto exchange operators Coinbase Global (COIN) and Galaxy Digital (BRPHF) to stop using Silvergate as banking partners.

Furthermore, analyst downgrades on SI are piling up. Compass Point Research & Trading and Wedbush Securities have recently downgraded the stock to a sell-equivalent rating. Along with other Wall Street analysts, JPMorgan analyst Steven Alexopoulos downgraded the stock from Neutral to Underweight.

Shares of SI have declined 73.8% over the past month and 98.1% over the past six months to close the last trading session at $1.43.

Here are the factors that could affect SI’s performance in the upcoming months:

Disappointing Financials

For the fourth quarter (ended December 31, 2022), SI’s adjusted net income available to common shareholders and adjusted EPS decreased 17.7% and 27.3% year-over-year to $15.12 million and $0.48, respectively. The company’s digital asset customers were 1,620, a decline of 3.4% year-over-year.

Furthermore, the company’s total deposits declined 30.2% from the year-ago value to $9.39 billion. As of December 31, 2022, its total assets came in at $11.36 billion, down 29.1% from December 31, 2021.

Discouraging Analyst Estimates

Analysts expect SI’s revenue to decline 71% year-over-year to $23.17 million for the second quarter ending June 2023. The company’s EPS for the same period is expected to decrease by 87.6% year-over-year to $0.14. Furthermore, analysts expect SI’s EPS for the current fiscal year (ending December 2023) to decline 97% from the previous year to $0.11.

Poor Profitability

SI’s trailing 12-month ROCE and ROTA of negative 85.77% and 8.26% compare to the industry averages of 11.05% and 1.15%, respectively. Also, the stock’s trailing 12-month net income per employee of negative $3.13 million compares to the industry average of $91.49 thousand.

POWR Ratings Reflect Bleak Prospects

SI’s overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SI has an F grade for Growth and Sentiment, consistent with its weak financials and disappointing analyst expectations. Also, the stock has a D grade for Stability. Its 24-month beta of 2.10 justifies its Stability grade.

In addition, the stock has a D grade for Quality, consistent with its lower-than-industry profitability.

SI is ranked last among 43 stocks in the F-rated Pacific Regional Banks industry.

Beyond what I have stated above, we have also given SI grades for Value and Momentum. Get all SI ratings here.

Bottom Line

SI has been on a downward trajectory and is currently trading well below its 50-day and 200-day moving averages of $9.11 and $45.19, respectively. The company recently disclosed plans to shut down operations and voluntarily liquidate assets at its crypto-friendly subsidiary, Silvergate. Also, the company requested more time to file its annual financial report.

Given business challenges, including growing liquidity concerns amid a crisis of confidence from digital asset customers, and regulatory challenges, such as pending inquiries and investigations from regulators, SI is reevaluating its businesses and strategies.

Amid this backdrop, bets against SI remain exceptionally high, labeling it a so-called meme stock. Despite the possibility of a short squeeze, this risky stock could be best avoided, given its weak fundamentals and a challenging macro environment.

Stocks to Consider Instead of Silvergate Capital Corporation (SI)

The odds of SI outperforming in the weeks and months ahead are significantly compromised. However, there are many Regional Banks stocks with impressive POWR Ratings. So, consider these three B (Buy) stocks instead:

BayCom Corp (BCML)

BankFinancial Corporation (BFIN)

Western New England Bancorp, Inc. (WNEB) 

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SI shares were trading at $1.36 per share on Monday afternoon, down $0.07 (-5.00%). Year-to-date, SI has declined -92.18%, versus a 7.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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