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It’s hard to believe that people used to perplexingly talk about “this strange new thing” called the Internet. We laugh now at the puzzled looks on TV presenters’ faces when told by a nerdy tech guy that in the future everyone will shop, bank, consume culture, and have a whole alternative existence in this new, exciting, online universe.
These days, people often react the same way when the talk turns to cryptocurrencies. The new form of digital money has been making headlines for the last decade, led by the ‘Daddy of Crypto’, Bitcoin. However, it has yet to properly penetrate the mainstream. The volatile asset and its fellow cryptocurrencies (commonly known as Altcoins) have been tarnished by the traditional banking system’s fear of the uncontrollable assets, and by the public’s perception of the crypto industry as a shady and unregulated market. Adding fuel to the fire, prominent investors such as Warren Buffet have called Bitcoin ‘rat poison squared’, while JP Morgan’s Jamie Dimon has decried it as a ‘fraud’.
But is this all about to change? In a recent report called “Imagine 2030”, Deutsche Bank strategist Jim Reid outlined a scenario in which “rising doubts about the sustainability of government-backed currencies amid higher inflation could drive more people to digital assets.”
“The forces that have held the current fiat system together now look fragile and they could unravel in the 2020s,” said Reid. “If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar.”
So, with the new decade in sight, and the help of TipRanks’ handy Stock Screener, we looked up two digital currency related stocks which are turning heads right now, and are poised to make an impact in the coming years. Let’s take a look.
Silvergate Capital (SI)
One of the hurdles the emerging crypto industry must overcome is acceptance from the mainstream banking system. As more institutions integrate digital money into their structures, the industry stands to gain legitimacy.
One such company to bank on the emerging asset class is the newly listed Silvergate Capital. Founded in 1988 as an industrial bank, Silvergate changed tactics in 2013 to concentrate on the nascent digital currency industry. 70% of its total deposits come from the industry, with these including most of the major digital currency exchanges and a substantial number of investors that trade on these platforms.
Silvergate’s USP (unique selling point) is its proprietary SEN (silvergate exchange network). The network connects crypto exchanges and investors as well as enables transactions of U.S. dollars between SEN members.
Barclays’ Jason Goldberg is attracted to the leading crypto bank for a number of reasons. Citing the bank’s leading position in servicing the fast-growing industry with significant first-mover advantages, and a unique service proposition that gives it a low cost deposit base and relationship monetization potential, the 4-star analyst said, “SI is the leading bank serving the expanding digital currency industry. SI is one of only a small group of banks that offer US. dollar deposit accounts (SI does not hold digital currency deposits) and banking services for digital currency market participants in a manner that is designed to be regulatory-compliant. With $1.3bn in digital currency related deposits, we believe SI has the largest share of the deposits across the industry.”
Therefore, Goldberg initiated coverage of Silvergate with an Overweight rating and a price target of $19, indicating upside potential of 16%. (To watch Goldberg’s track record, click here)
The digital currency bank is up by over 30% since its initial November listing, though it is still rather quiet on the Street when it comes to opinions on the bank’s prospects. Only one other analyst currently has a take on SI, marking it as a Moderate Buy. The average price target is $18, set to provide gains of 10%, should the target materialize. (See Silvergate stock analysis on TipRanks)
Square Inc (SQ)
An increasingly solid player in the digital payment field, tech company Square provides payment solutions to merchants, while also allowing for peer-to-peer payments through its mobile Cash app. The company has a history of innovation - its first product was the Square Reader, which connected credit cards to an iPad or an iPhone via the device’s audio jack.
Square added the ability to purchase Bitcoin in the Cash App in late 2017, and the cryptocurrency plays a big part in consumer engagement as Bitcoin users are twice as likely to have the Cash Card as opposed to non-users. Bitcoin revenue in 3Q19 was roughly $148 million (48% of total Consumer revenues), growing 245% year-over-year.
The success of its Cash App has contributed to Square’s solid growth curve. The company’s eco system is expanding and Square's gross payment volume (GPV) increased 25.5% year-over-year in Q3. Q3 revenue of $1.27 billion indicated a 43% increase year-over-year. EPS almost doubled too, rising from 13 cents to 25 cents, while also beating the estimates by 25%.
FinTech companies are revolutionizing banking models, and Square is well positioned to attract underserved merchants and tech-savvy consumers into the digital economy. Deutsche Bank’s Bryan Keane recognizes the growing presence, with the 5-star analyst noting, “Cash App has delivered positive revenue retention for each of its monthly customer cohorts since 2015 showcasing its ability to grow from only its existing base. In addition, SQ continues to innovate with the most recent addition being the ability to invest in high value stocks by splitting the shares into smaller lots and we believe new revenue driving features like a credit card offering could be announced next year”.
To this end, Keane reiterated a Buy rating on Square, along with a price target of $98. With the mobile payments processing company currently trading at $65.55, this provides handsome upside potential of 50%. (To watch Keane’s track record, click here)
A breakdown of 13 Buys, 8 Holds, and 2 Sells from Wall Street analysts currently marks Square as a Moderate Buy. The average price target of $73.24, indicates upside potential of 12%. (See Square stock analysis on TipRanks)