Voyager Digital: A One-Stop Crypto Solution – Seeking Alpha

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Voyager Digital Ltd. (OTCQB:VYGVF)

Following a successful fiscal 2020 with revenues up over 1,200%, customer asset growth of almost 2,000%, brokerage accounts up over 750%, and a recently completed capital raise, Voyager is well positioned to continue growing its user base, product offering, and geographic reach. We are bullish on VYGR’s long-term prospects. We initiate with a BUY Long-Term rating and a $2.75 price target.

52-Week Range

$0.09 – $2.52

Total Debt

$1.1M

Shares Outstanding

114.1 million

Debt/Equity

0.5%

Insider/Institutional

66.0%/1.0%

ROE (LTM)

NM

Public Float

91.7 million

Book Value/Share

$0.06

Market Capitalization

$229.4 million

Daily Volume (90-day)

245,524

FYE Jun

FY 2020A

FY 2021E

FY 2022E

EPS ($)

ACTUAL

CURRENT

PREVIOUS

CURRENT

PREVIOUS

Q1 Sep

$(0.04)A

$(0.04)A

$0.00E

Q2 Dec

$(0.01)A

$(0.02)E

$0.01E

Q3 Mar

$(0.02)A

$(0.01)E

$0.01E

Q4 Jun

$(0.06)A

$(0.00)E

$0.02E

Year*

$(0.13)A

$(0.07)E

$0.04E

P/E Ratio

NM

NM

39.1x

Change

NM

-47.2%

NM

FYE Jun

FY 2020A

FY 2021E

FY 2022E

Revenue ($ mil.)

ACTUAL

CURRENT

PREVIOUS

CURRENT

PREVIOUS

Q1 Sep

$0.1A

$2.0A

$6.6E

Q2 Dec

$0.1A

$2.8E

$7.9E

Q3 Mar

$0.3A

$3.9E

$9.3E

Q4 Jun

$0.7A

$5.3E

$10.6E

Year*

$1.1A

$14.0E

$34.4E

Change

1,217%

1,113%

146.3%

* Numbers may not add up due to rounding.

Introduction

  • Voyager is a crypto-asset broker that provides retail and institutional investors with a platform to invest and trade in digital assets. The firm allows investors to earn interest on their digital assets.
  • Voyager delivered a strong FY:20 – revenues up over 1,200%, customer asset growth of almost 2,000%, and brokerage accounts up over 750%.
  • Voyager has a lot of opportunities to grow and expand its customer base including new product launches, geographical expansion, and M&A.
  • Management sees strong growth for the next several years. The company is projecting revenue to reach a run rate of ~$100 million by December 2022.
  • There is a renewed interest in cryptocurrencies with Bitcoin reaching its highest price in nearly three years.
  • We are bullish on VYGR’s long-term prospects. We initiate coverage with a BUY Long-Term rating and a price target of $2.75, implying a capital appreciation potential of ~37% (based on recent price of $2.00).

Primary RISKs

  • Voyager frequently has acquisitions. Failure to integrate any acquisition could result in additional risk and uncertainty for the business.
  • Crypto related business faces a very uncertain regulatory environment. There are high ambiguity and lack of clarity from many governments globally. Any unfavorable change could negatively impact operations.

Investment Thesis

Voyager Digital Ltd. is a crypto-asset broker that provides retail and institutional investors with a platform to invest and trade in digital assets. Through its mobile friendly platform, users can invest in more than 50 cryptocurrencies and earn interest on 22 different digital assets. Following a successful fiscal 2020 with revenues up over 1,200%, customer asset growth of almost 2,000%, brokerage accounts up over 750%, and a recently completed capital raise, Voyager is well positioned to continue growing its user base, product offering, and geographic reach.

The recently announced acquisition of France-based digital asset exchange LGO expands VYGR’s reach in Europe. Similarly, the firm is targeting to grow its footprint in Canada. We believe this global expansion should further boost Voyager’s platform in terms of customers and revenue. The company has been onboarding additional interest-bearing assets (bringing the total to 22) which have been a major driver of growth for the company. VYGR noted that it is likely to continue to increase the offering of its interest-bearing assets which could spur further user growth. Over the next year, the company plans on adding new products including margin, debit cards, and credit cards which will all expand its market opportunity.

Cryptocurrencies have seen growing interest from investors amid near zero to negative interest rates globally. Bitcoin has been one of the best-performing assets this year, up more than 150%. We are also encouraged by the recent announcements of large corporations that are broadening their product offerings and investing capital in this space. We believe this movement is a strong affirmation of growing adoption in the crypto space.

Voyager management sees strong growth for the next several years. The company is projecting revenue to reach a run rate of ~$100 million by December 2022.

Voyager witnessed rapid growth during FY:20 (ended June 30, 2020) with its revenue growing 1,159% to ~$1.1 million versus $87,318 in FY:19. The strong growth was fueled by a ~750% YOY increase in the number of customer accounts, from 10,000 in FY:19 to 86,000 in FY:20 (at the end of FY:20, 40,000 accounts were funded.). These new accounts led to growth in customer assets of 1,959% to $35.0 million on June 30, 2020, compared to $1.7 million on June 30, 2019. The value traded on Voyager keeps growing as the firm continues to add more digital assets to trade. The overall traded value on Voyager’s platform reached ~$120 million in November 2020 compared to just $2.3 million in December 2019. The company has expanded its coin offering to 55 coins as of December 8, 2020, with plans to add more in the near future, including 3 stablecoins and 10 decentralized finance (DeFi) coins.

Even during the recently released fiscal Q1:21 results, revenue grew 200% YOY. Assets under management (AUM) surpassed $165 million, up from $5 million USD at the end of December 2019, representing a 33x increase over a period. Net deposits continue to set daily records, averaging in excess of $750,000 per day during November 2020, up 10x from June 2020. Consequently, VYGR surpassed $1 million of monthly revenue for the first time during November 2020. The company expects this growth continuing into 2021.

Exhibit 1: VYGR Positioned for Rapid Growth

Source: Voyager Digital and Singular Research

Multiple drivers of growth

Voyager has many opportunities to grow and expand its customer base. Over the next fiscal year, the company is looking to expand into several foreign markets and obtain a New York BitLicense. Voyager has made strategic acquisitions to accelerate growth. In July 2020, the company announced its planned expansion into Canada, and recently, in October 2020, VYGR closed its acquisition of France-based LGO which expanded its footprint in Europe. LGO is a fully licensed European digital asset exchange which is focused on institutions. This merger of the two companies expands Voyager’s global reach into Europe and the firm’s global institutional capabilities. Additionally, management is looking at Latin America as a future target market. We believe this global expansion should further boost Voyager’s platform in terms of customers and revenue.

The company has been onboarding additional interest-bearing assets (bringing the total to 22) which have been a major driver of growth. The interest product allows customers to earn interest on a compounding basis and has propelled Voyager to being the preferred agency brokerage for trading and investing in digital assets. Management noted that it is likely to continue to increase the offering of VYGR’s interest bearing assets which could spur further user growth.

Over the next few years, the company plans on adding new products which will further expand its market opportunity. These products include debit cards, credit cards, loan programs, asset management, and insurance. Voyager expects to generate additional growth from new partnerships with leading trading platforms. These include relationships with Market Rebellion, LLC which has over 10,000 users and Sterling Trading Technologies which also has over 10,000 users.

Cryptocurrency Going Mainstream

There is a renewed interest in cryptocurrencies as Bitcoin has reached its highest price in nearly three years and has been one of the best-performing asset classes this year, up more than 150%. We are also encouraged by the recent announcements of large corporations that are broadening their product offerings and investing capital in this space. We believe this movement is a strong affirmation of growing adoption in the marketplace.

Earlier this month, PayPal Holdings (NASDAQ:PYPL) entered the cryptocurrency market by announcing that its customers will be able to buy and sell Bitcoin and other cryptocurrencies using their PayPal accounts. Square, Inc. (NYSE:SQ), a payments solutions company, recently announced that it has invested $50 million in Bitcoin. Asset manager Grayscale Investments has reported inflows of $719 million into its Grayscale Bitcoin Trust (OTC:GBTC). Another large U.S.-based firm, Microstrategy, has announced Bitcoin as the primary treasury reserve asset and already purchased more than $400 million in Bitcoin.

We believe Voyager will be a natural beneficiary of this growing adoption of crypto assets as this movement will increase VYGR’s user base and transaction volume.

One-Stop Crypto Solution

Voyager is creating a one-stop crypto solution, offering trading on over 50 digital assets and with interest on 22 of those assets. The demand for cryptocurrencies has increased over the past year as cryptocurrencies have become more widely accepted. However, the market is highly fragmented with more than 200 Exchanges facilitating trading of cryptocurrencies; there is no centralized place or service in which to trade. Users often have to open accounts with multiple exchanges in order to trade a specific coin.

Customers are demanding a one-stop shop where they can trade, earn interest, and invest in cryptocurrencies. Voyager solves many of these problems and provides consumers with the platform to fill this gap. Voyager is partnered with other leading players in the digital assets industry such as Ledger, Bitgo, and Fireblocks, providing users with the most transparent, safe, and secure commission-free trading platform.

Voyager offers a single access point to research, manage, trade, and secure cryptocurrencies for novice and sophisticated investors. Some of the services offered by Voyager include:

  • New accounts in less than two minutes (including KYC/AML);
  • One of the highest interest payouts in the industry;
  • Commission-free trades on over 50 of the most popular coins;
  • Faster execution and more depth of liquidity across markets;
  • Real-time market data, news, and advanced charts;

Exhibit 2: VYGR Unparalleled Competitive Differentiation

Source: Voyager Digital and Singular Research

Competition

The cryptocurrency exchange market is highly fragmented with multiple platforms offering online trading and wallets; therefore, multiple online/mobile players provide different components of the cryptocurrency ecosystem. The largest U.S. exchanges are Coinbase, Kraken, Gemini, and Binance (U.S.). However, most of these exchanges offer little or no information on their platforms, trade execution is opaque, and the platform itself is hard to use. In contrast, Voyager offers users a mobile friendly experience with an ease of use and best-in-class trade execution. Additionally, large exchanges mainly focus on institutional volume, neglecting the retail consumer which Voyager intends to target.

The competitive landscape has been intensifying as the cryptocurrency space is seeing entry of traditional brokers as well as payment solution firms such as Robinhood, Sofi Invest, Square, and most recently PayPal. These firms have started offering the ability to buy and sell cryptocurrencies. However, the number of coins offered for trading is still limited (five or less in most cases). Here, we believe Voyager has a competitive advantage given that the firm offers more than 50 coins for trading and also allows users to earn interest on 22 coins, unlike traditional competition that offers none.

Industry Overview

Crypto-asset trading is a fast-growing part of the financial sector. Within the financial services industry, the next wave is likely to be the large-scale adoption of digital assets by institutions. These institutions require enterprise-grade services to store, transact, and support their digital asset investments. Voyager offers a full suite of products, including digital exchange (platform for trading), custodian services, and other related products.

Voyager generated nearly 77% of its total revenue from the fees it earned via its trading platform. We believe growing volumes of cryptocurrency trading should further support the growth of VYGR’s exchange business. Cryptocurrency data provider Coin Metrics predicts that Bitcoin’s daily volume could surpass that of the U.S. equity market. Bitcoin as an asset class has incredible growth potential due to its low trading volume compared with more traditional markets. According to Coin Metrics, the daily spot market volume of Bitcoin was just $4.1 billion (as of June 30, 2020) compared to $446 billion, $893 billion, and $1.98 trillion for equity, bond, and global forex markets. At the current rate of growth, Bitcoin daily volume will match or surpass other major asset classes by 2024 or 2025. This result would mean almost 100x growth in daily volume which would benefit VYGR’s exchange business.

Several traditional financial institutions are starting to enter the market. The growing interest from traditional financial institutions to enter the digital asset space is a validation of the large market opportunity. Fidelity has launched a new division, Fidelity Digital Assets, which offers Bitcoin custody and trade and settlement services. Nomura and StateStreet are some of the other renowned names that have launched digital asset custody services. Recently, payment firms such as Square Inc. and PayPal Inc. have announced cryptocurrency offerings for their users. This adoption clearly shows the growing popularity of digital assets and the massive opportunity that exists going forward.

Exhibit 3: Bitcoin Volume Small Compared to Other Asset Classes

Source: Coin Metrics and Singular Research

Exhibit 4: Bitcoin Volumes Could Grow 100x Over the Next Four Years

Source: Coin Metrics and Singular Research

Management and Shareholders

The company is led by CEO Stephen Ehrlich. Mr. Ehrlich is one of the four co-founders of the firm. The co-founders combined have decades worth of experience from leading organizations like E*TRADE, Uber, TradeIt, Lightspeed Financial, and more. Prior to founding VYGR, Stephen Ehrlich founded Lightspeed Financial, a retail broker/dealer where he was responsible for eight major acquisitions.

Latest Quarterly Results

Revenue grew 2,670% to approximately $2.0 million for the first quarter ended September 30, 2020, compared to $72,223 for the first quarter ended September 30, 2019. The Company saw significant growth in revenue which is generated from two sources, fees, which include spread revenue and transactional fees related to movements on the blockchain, and interest, which is generated from the storage of cryptocurrencies with various custodians. For the first quarter ended September 30, 2020, fee income accounted for 81% of total revenue.

Management noted that allowing customers to earn interest while the trade has been a significant driver in the growth of the business. Assets under management surpassed $150 million (as of 12/14/20, AUM is $165 million), up from $5 million at the end of December 2019, representing a 30x increase over a period. Net deposits continue to set daily records, averaging in excess of $750,000 per day during November 2020, up 10x from June 2020. VYGR surpassed $1 million of monthly revenue for the first time during November 2020.

For the quarter ended September 30, 2020, operating expenses increased to $4.7 million versus $2.6 million for the prior year’s quarter. Net loss for Q1:21 was $3.9 million versus loss of $2.5 million for Q1:20, resulting in a diluted loss per share of $0.04 in Q1:21.

The company had cash and cash equivalents of $7.4 million on September 30, 2020, versus $3.6 million in the previous year ago quarter. The increase in cash and cash equivalents during the most recent quarter was primarily due to the cash from proceeds from capital raises which was offset by cash used in operating activities.

During Q1:21, Voyager added its 52nd digital asset and 10th DeFi asset to its commission-free crypto trading platform. VYGR also increased its interest offering to 22 assets up from 14 assets as of June 30, 2020.

EPS Guidance and Estimates

For FY:21, VYGR expects strong growth to continue, led by geographical expansion, new product launches, and platform enhancements. Some examples of new products include the development of debit and credit cards, margin products, desktop, and continued expansion of its interest program. In addition to adding new features and implementing platform enhancements, VYGR is also focused on expanding internationally and bringing the Voyager App to investors in other countries.

For FY:21, we forecast revenue of $14.0 million compared to $1.1 million in FY:20. We forecast an EBITDA loss of $5.3 million, a net loss of ~$7.6 million, and earnings per share of $(0.07). We expect revenue to continue to grow and anticipate improvement in profitability given the inherent operating leverage of the business model.

For FY:22, we forecast revenue of $34.4 million compared to $14.0 million in FY:21. We forecast EBITDA of $5.9 million and net income of ~$4.7 million.

Investment Risks

  • Hacking is a big threat which in the past has impacted many other exchanges. If the company were to be hacked, it could materially affect the company’s operating results and the future health the business. The company does have diversified custodian partnerships where the assets are insured.
  • Crypto related business faces a very uncertain regulatory environment. There are high ambiguity and lack of clarity from many governments globally. Any unfavorable change could negatively impact operations.
  • The crypto asset trading industry is highly competitive with the presence of large companies such as Coinbase, Kraken, and Binance.
  • Voyager may require regulatory licenses and qualifications that it does not currently possess, and that may be costly and time-consuming to obtain and, even if obtained, may subsequently be revoked.
  • Voyager frequently takes part in acquisitions. Failure to integrate any acquisition could result in additional risk and uncertainty for the business.

Valuation

We value VYGR using a blend of peer multiples and a DCF methodology.

Voyager’s valuation is challenging given its early stage and the limited number of publicly traded pure-play digital exchange companies. We look at private digital exchanges and use a 30-day trading volume in comparison to its valuation to create a multiple to value Voyager relative to its peers. We value VYGR at a ~1.3x valuation to a trading volume multiple. We use ~$250 million as VYGR’s average 30-day trading volume for the next 12 months. The ~$250 million average 30-day trading volume is 75% of the average AUM (check income statement for AUM) over the next four quarters. As a result, we arrive at a multiple based target price of $2.40 (or C$3.12).

Based on our DCF model, we apply the Company’s current weighted average cost of capital as a discount rate to determine a present value of future cash flows based on recent financial performance and risk parameters. We use a discount rate of ~15.1% and a terminal growth rate of 3.5%. The result of our analysis is an intrinsic value of $2.97 (or C$3.83). The combination of $2.40 at 50% and $2.97 at 50% results in a weighted average price target of $2.69 which we round up to $2.75.

Best of the Uncovereds offers new initiation reports on roughly two dozen companies per year, with a focus on under-followed small and mid caps with significant potential. We provide a quarterly earnings update reports on all companies covered, as well as flash reports on significant news announcements by companies. We go further for members, providing recorded interviews with management teams of covered companies when available and a monthly quantitative based “Market Indicators and Strategy Report.”

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VYGVF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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