Despite a sell-off last week primarily due to traders taking profits, the price of Bitcoin has surged nearly 170% so far this year to reach just under $20,000 yesterday. The coronavirus crisis, a dovish monetary policy, and a weak US dollar have enhanced its appeal to investors. Consequently, cryptocurrencies have rallied sharply over the past few months.
Riot Blockchain Inc. (RIOT) and Silvergate Capital Corp (SI), two of the prominent players in the digital and cryptocurrency industry, have been thriving amid the pandemic as investors are now considering cryptocurrencies into their portfolio to hedge against inflation.
Both stocks generated significant returns over the past year. While RIOT returned 363% over this period, SI gained 106%. In terms of year-to-date performance, RIOT is a clear winner with a 458% return versus SI’s 108%. But which of these stocks is a better pick now? Let’s find out.
Business Structure and Latest Movements
RIOT focuses on building, supporting, and operating the Blockchain technologies ecosystem as well as manufacturing in-vitro substances. Its portfolio includes Verady, Coinsquare, and Tesspay, which are involved in digital currency mining operation, which utilizes specialized computers that generate digital currency, primarily bitcoin. RIOT’s currently deployed hardware fleet consists of 6,040 next generation Bitmain Antminers, with a hash rate capacity of 456 PH/s.
RIOT is aggressively continuing its operational expansion with the purchase of an additional 2,500 next generation S19 Pro Antminer rigs from BitmainTech PTE in October. The company wants to increase its current hash rate from around 500 PH/s – to an estimated 2.3 EH/s by June 202,1 by deploying a total of 22,640 miners. RIOT paid $6.1 million for the rigs whose delivery and deployment are scheduled for December.
SI operates as a bank holding company for Silvergate Bank that provides banking products and services to business and individual clients in the United States and internationally. The company focuses on innovative financial infrastructure solutions and services for participants in the nascent and digital currency industry. SI has more than 925 digital currency customers that are using its platform daily to grow and scale their businesses.
SI has significantly grown its key asset in the past two years, the Silvergate Exchange Network (SEN), a virtually instantaneous payment network using the company’s application programming interface (API). SI has recently achieved $100 billion in transfer volumes across its SEN platform. The bank added 47 new digital currency clients in the last reported quarter and has 200 cryptocurrency clients in the pipeline or onboarding process.
Recent Financial Results
In the third quarter that ended September 2020, RIOT’s mining revenue surged 41.5% year-over-year to $2.4 million. The company has produced 730 newly minted bitcoins (BTC) year-to-date, despite experiencing downtime in the previous quarter. RIOT reported a quarterly loss of $0.04 per share, significantly improving from the quarter-ago loss of $0.31 per share.
RIOT received and deployed 3,040 next-generation Bitmain S19 and S19 Pro Antminers during the period of July through November 2020, increasing the company’s total hashrate capacity to 566 PH/s. RIOT also contracted for 15,600 next-generation Bitmain S19 Pro Antminers in the third quarter of 2020.
SI’s deposit related fees from digital currency customers were $3.3 million in the third quarter, increasing 36% year-over-year, with 68,361 transactions handled by SEN. Digital currency deposits grew $586 million sequentially to $2.1 billion. Total loans were $1.4 billion, rising 39.7% compared to the year-ago quarter. EPS for the quarter came in $0.37, rising 27.6% sequentially.
The SEN handled $36.7 billion of US dollar transfers in the last reported quarter, an increase of 252%, compared to the year-ago value of $10.4 billion. SI is witnessing exponential growth in digital deposit from firms and institutional investors in the cryptocurrency industry. The increased price and volatility in Bitcoin are allowing near zero cost deposits for SI’s securities and loans portfolio.
Here RIOT is in an advantageous position.
Past and Expected Financial Performance
While RIOT’s revenue grew at a CAGR of 9.1% over the past 12 months, its EPS declined at an average rate of 63.7% in the same period.
The market expects the company’s revenue to increase 412.5% next year. RIOT’s EPS is expected to grow 103.8% next year and at a rate of 20% per annum over the next five years.
On the other hand, SI’s revenue and EPS both declined at a CAGR of 11.7% and 32.7%, respectively, over the past 12 months.
The market expects SI’s revenue to increase 7.2% next year. The company’s EPS is expected to grow 84.2% in the current quarter, 8.8% in the current year, and 3.2% next year.
RIOT has an edge over SI here as well.
SI’s trailing-12-month revenue is more than ten times of what RIOT generates. Additionally, SI is more profitable with a net income margin of 25%, versus RIOT’s negative value.
Moreover, SI’s ROE and ROA of 8% and 0.9% compare favorably with RIOT’s negative return.
In terms of trailing-12-month P/S, RIOT is currently trading at 25.92x, 236% more expensive than SI, which is currently trading at 7.49x. Moreover, SI is less expensive in terms of trailing-12-month P/B (2.18x versus 5.04x),
Though RIOT looks much more expensive compared to SI, it’s worth paying this premium considering RIOT’s earnings growth potential.
Both RIOT and SI are rated “Strong Buy” in our proprietary POWR Ratings system. Here are how the four components of the POWR Ratings are graded for RIOT and SI:
RIOT has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade and a “D” for Industry Rank. In the 54-stock Technology – Services industry, it is ranked #8.
SI has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade and a “C” for Industry Rank. It is ranked #7 in the 52-stock Pacific Regional Banks group.
While both RIOT and SI are good long-term investments considering their continued business growth and wider cryptocurrency adoption, RIOT appears to be a better buy based on the factors discussed here.
Digital payments giants like Square (SQ) and PayPal (PYPL) have recently rolled out a new service allowing their customers to transact in Bitcoin. Moreover, money management giant Fidelity is launching a bitcoin fund for wealthy investors. Hence, the growing popularity of Bitcoin among investors could further strengthen the demand for cryptocurrency.
While SI is a relatively cheaper option to bet on the accelerating shift toward cryptocurrency by both institutional and retail investors, RIOT is growing rapidly and its premium valuation is justified as it has more room to grow its earnings.
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SI shares were trading at $35.74 per share on Tuesday afternoon, up $0.15 (+0.42%). Year-to-date, SI has gained 124.64%, versus a 15.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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