If you believe the political pollsters and pundits, then this week’s midterm elections will usher in a sea-change, as a ‘red tsunami’ crashes into Congress, state governor’s mansions, and state legislatures. While the only poll that truly counts is that one that starts on Tuesday morning, all signs are pointing toward an overwhelming victory for the Republican party.
This is not the place to speculate on the political impact, or the potential party splits at the Federal and State levels – but we do want to bring your attention to the cryptocurrency sector. The loss of the Democrats’ Congressional majority will put their plans for cryptocurrency regulation on hold, while the incoming Republicans are likely to be more friendly to the crypto sector.
“We believe crypto is one of the few sectors we follow where the midterms will have a material impact on policy,” said Cowen analyst Jaret Seiberg. “Republicans tend to be more accepting of fewer limits on crypto products because they are decentralized and different… We believe a GOP sweep of the midterm elections would be the best outcome for crypto, though we caution against overreacting.”
Sector regulation is still possible, but not as intrusive as legislators have recently been contemplating. We’ll know more by week’s end, when we see by just how much the Congressional majorities switch.
In the meantime, we can start taking a look at crypto stocks. These are companies directly involved in the crypto markets – in cryptocurrency investing, trading, and exchange – and their prospects will likely improve in direct proportion to the magnitude of a Republican Congressional victory.
Silvergate Capital (SI)
We’ll start with an investment bank, Silvergate Capital. This California-based commercial banking firm has been focused on digital assets, particularly cryptocurrency for almost 10 years; this focus has capped 24 years of profitable operations. Silvergate caters to institutional investors and crypto and digital currency exchanges.
The bank’s stock has been volatile this year and, like bitcoin, it is down sharply year-to-date. In fact, Silvergate’s stock has actually underperformed compared to the flagship crypto coin; BTC is down 55% this year, while SI shares are down 66%.
At the same time that the bank has seen its share price decline, it has also seen revenues and earnings rise. Both the top and bottom lines have shown sequential gains in the first three quarters of this year.
In the most recent reported quarter, 3Q22, Silvergate showed solid results. Net income rose 84% year-over-year, from $23.5 million to $43.3 million; net income available to shareholders came in at $40.6 million, or $1.28 per share. The net was up 72% y/y, while the EPS was up 45%. And finally, in a vital metric for a commercial bank with a heavy crypto focus, Silvergate grew its digital customer base in Q3, from 1,305 in the year ago period to 1,677 in the recent report – a solid y/y gain of 28%, despite the difficult environment for cryptocurrencies over the last 12 months.
However, there were a couple of rough points. First, the $1.28 net income per share for stockholders missed the forecast, coming in 12 cents, or 8.5%, below expectations. And second, the bank felt the pain of crypto’s decline in recent months. Finally, Silvergate has, to some extent, entered a ‘holding pattern’ on new initiatives as it waits to see what the regulatory landscape will look like.
That last point may be key. At the beginning of this year, Silvergate bought from Meta (then Facebook) the Libra stablecoin digital currency project, with a goal of launching by year’s end. The company has now acknowledged that it will not clear that bar, although it continues to work on the legal and regulatory compliance issues involved in a stablecoin launch.
5-star analyst George Sutton, of Craig-Hallum, picked up on this in his recent coverage, noting: “Given the open possibility of federal stablecoin legislation in the relatively near future, and D.C. shifting its focus to mid-term elections, we can appreciate the desire to take a ‘wait and see’ approach in the interim so that it can make decisions with greater clarity.”
Regarding the stock generally, Sutton said, “Future expectations for this stock tend to swing wildly q/q. There is significant euphoria when things are going well, the market overshoots, and expectations tend to get ahead of themselves. With business trends and the crypto ecosystem slowing, we believe the market has pessimistically overshot to the downside. We believe current business trends reflect a short-term cyclical lull in a long-term secular growth opportunity. At 7.4x FY23 EPS estimates, expectations have come down significantly which creates an attractive opportunity.”
To this end, Sutton rates SI shares a Buy along with a $100 price target, which implies ~100% upside potential in the next 12 months. (To watch Sutton’s track record, click here)
Turning to the TipRanks data, we’ve found that Wall Street’s analysts hold a range of views on SI. The stock has a Moderate Buy consensus rating, based on 7 recent analyst reviews, including 4 Buys, 2 Holds, and 1 Sell. The stock is trading for $50.46 and its $84.43 average price target suggests it has ~67% upside going into next year. (See SI stock forecast on TipRanks)
Coinbase Global (COIN)
Next up is the obvious stock to look at when talking crypto, Coinbase. The company, a heavy-hitter with a $14.5 billion market cap even after a 78% year-to-date share price loss, is a leader in the online digital currency exchange market. Coinbase is huge – it has more than 108 million verified users, operates in over 100 countries, has some $101 billion in assets on its platform, and saw $159 billion in quarterly trading volume during 3Q22 – and that wasn’t even a particularly good quarter for the company.
Coinbase was hurt by lower trading volumes in Q3, and its transaction revenue came in at $366 million, down 44% sequentially. In the drill downs, the subscription revenue segment of the total top line was up 43% y/y, to $211 million. Total revenue for the third quarter was $576 million, significantly lower than the $1.3 billion from last year’s Q1.
The most dangerous metric Coinbase reported was an ongoing contraction of its monthly user base. The company reported 9.2 million monthly users in 1Q22, 9 million in 2Q22, and 8.5 million in 3Q22 – the direction and trend are clear, and show that the decline in cryptocurrency values is hurting the crypto exchange platforms as well.
Coinbase management did point out uncertainty in the regulatory environment as a headwind facing the company and the industry. The company described US crypto policy as ‘at an inflection point,’ and pointed to the August 2022 bipartisan Digital Commodities Consumer Protection Act introduced in the Senate. This legislation is currently stalled, and given the partisan shift likely this week it will not be reintroduced until the next Congress convenes in January. At the same time, the prospect bipartisan legislation does promise a measure of clarity for the crypto markets after the midterm elections.
In his coverage of this crypto stock for Canaccord Genuity, 5-star analyst Joseph Vafi sees Coinbase in a fundamentally sound position despite its current difficulties. He notes that while trading volumes are down, the company has not seen customer cancellations.
“COIN remains sound regarding its strategy and product roadmap in our view. Specifically, we like the company’s revenue diversification strategy through increased subscription & services, offshore expansion amid domestic regulatory uncertainty through principal approval in Singapore, and increased interest income from USDC due to rising rates. Notably, COIN reduced operational expenses by 22%, excluding an impairment charge this quarter. While many of COIN’s customers aren’t trading that much right now, they are HODLing and haven’t gone away,” Vafi opined.
Looking ahead from this stance, Vafi rates COIN shares a Buy, and he sets a $120 price target that indicates his confidence in a robust one-year upside of ~112%. (To watch Vafi’s track record, click here)
Turning now to the rest of the Street, 11 Buys, 7 Holds and 4 Sells have been received in the past three months. This means that the analyst consensus is a Moderate Buy. With the average price target clocking in at $83.80, shares could surge ~48% in the next twelve months. (See COIN stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
