Voyager Digital: Hard To Value, But Even Harder To Ignore

Summary

• Voyager Digital is an innovative crypto exchange that has grown revenues at 18000% in the last month.
• The company offers a great product, though it is not completely unique.
• It's hard to value voyager, but at today's price I think downside is limited, while upside could be huge.

Photo by peepo/E+ via Getty Images

Thesis Summary

Voyager Digital Ltd. (VYGVF) has gained a lot of attention both as an innovative crypto broker and as a promising investment. Indeed, the stock has returned +3000% over the last six months. With that said, the company is still in very early stages, making it a hard investment to value. Fundamentally though, I like what Voyager is doing in the crypto-space, although it is not unique, and might consider adding in the coming days.

Company Overview

Given that Voyager remains a somewhat obscure stock, let’s go through some of its recent history and review its latest financial statements.

Source: April Update

Voyager began its business in 2018 and became publicly listed in 2019. Soon after, the company launched iOS. In Q4 2019, Voyager acquired some assets from Ethos, including Ethos Universal Wallet and Ethos Bedrock. Soon after, the company began allowing its users to obtain interest for their crypto assets, which sped up growth and client acquisition. Currently, the company has over $2.4B in AUM, and Voyager achieved 18000% revenue growth in the last month. As we can see from the income statement, the company has sped up its growth in the last few months:

Source: Monthly Report Jan 2021

In the six months ended December 2020, the company achieved over $5.5 million in revenues, with about ⅓ coming from” interest income from custodians.” While the operating loss was similar as in 2019, net loss was significantly higher, in part due to a $17 million loss through “change in fair value of liability.”

In terms of the balance sheet, here’s the latest available information:

Source: Monthly Report Jan 2021

The balance sheet has expanded considerably too, though not as fast as revenues. Nonetheless, total assets and liabilities have gone up around sevenfold, staying proportionally quite even.

Clearly, the company has stumbled on a winning formula, and crypto enthusiasts are flocking towards Voyager. But just how much can the company grow? And how much should shares be worth today?

Voyager: Moving in the Right Direction

Let’s begin by understanding what exactly Voyager does and why it has seen so much success. Like other crypto exchanges, users can, relatively easily, set up an account and exchange their fiat money for cryptos. What has attracted many to Voyager though, is the fact that users can obtain interest in their crypto holdings.

Source: Investovoyager.com

The most natural question for those that aren’t familiar with this process would be: How exactly is this interest obtained? As far as I know, there are at least two ways that crypto holdings can earn interest: staking and liquidity pools.

Staking is when a cryptocurrency is “blocked” in a wallet, much like what would happen with a savings plan. These blocked cryptocurrencies can then be used to mine cryptocurrencies. Or rather, they are randomly awarded cryptocurrency as a “reward”. The process is very similar to mining, which involves Proof-of-Work. In this case though, what we have is Proof-of-Stake (POS). Staking can supposedly help increase the scalability of blockchain networks, which is why Ethereum has moved to a PoS method.

On the other hand, you can use your cryptocurrencies to provide liquidity to the market, which also rewards you with interest, quite similar to what CDs used to offer. This is the case, I believe, with USDC, which is a stablecoin that tracks the value of the dollar. By providing liquidity to the exchanges, which they need to keep the rate pegged to the dollar, you are rewarded with a, very juicy, interest of 9%.

I understand that some people would initially be sceptical, so was I, but there is in fact a legitimate reason behind this interest, and this is not the product of some pyramid scheme, although I have encountered such systems in the crypto world, so watch out.

Pursuing Growth At All Cost

With that said, it is clear that Voyager offers a superior product to many of its competitors. While Coinbase Global, Inc. (COIN) and Kraken do have some interest-bearing assets, they are less attractive than Voyager's. Binance US, according to Voyager, does not offer interest. As a European citizen, I can only confirm that Binance does in fact offer interest on many assets here, and I believe its products compete quite closely with Voyager.

Having said this, it seems that Voyager is definitely a great option in the U.S., and management is pursuing growth at all costs in the coming quarters. The company recently completed a capital raise in March, and is intending to use most of it for marketing:

So, we're going to spend a good chunk of that money, have it determined exactly the amount on the marketing side, but then build out the team right and as we've always talked about and we hired leadership positions in Dan Costantino, David Brosgol. We're going to add some more leadership positions to place where we think we need it such as marketing and then we're going to just keep in the team all together and deep in our service team, but the lion share, 50% of our increased budget is going to be in a marketing

Source: Earnings Call

On top of that, we have seen some encouraging numbers come out of the earnings call, such as a 20% monetization rate in April and a 30% retention rate. Lastly, management also pointed out that one of their most active and profitable days was when Bitcoin fell over 10%, which shows that users are actively buying the dip and shows the company can thrive even with falling Bitcoin prices.

Risks

Of course, some significant challenges lie ahead. While I do think that Voyager offers a great product, there is a lot of hype and speculation behind the company. Many have said that it’s just a matter of time before the company starts offering debit cards and also stock trading. I am sure this is in the cards, but I would like to point out that many companies already do this. Binance, which I mentioned before, already offers its users debit cards and has a wide pool of assets, including shares now. This may not be the case in the U.S, but it is certainly the case in Asia and Europe.

While some analysts also claim that Voyager could displace traditional banks, who is to say the opposite won't be true? Voyager doesn't really have a "moat" around its business. What Voyager does, could also be done by the large institutional banks, as well as other exchanges.

The other main risk, of course, relates to security, which Voyager has already had to deal with. It really is impossible to quantify this risk, but investors have to be aware that exchanges get attacked, and sometimes successfully. Mt. Gox was at one point the largest crypto exchange in the world and no longer exists. This is especially relevant to Voyager because when you are staking, usually, your cryptocurrencies have to be on the network, meaning they cannot keep most of their assets in cold storage like Coinbase.

Valuation

With that said, what is Voyager actually worth? While it’s hard to get readily available valuation metrics on the company, Morningstar offers some insights:

Source: Morningstar

Using the most recent data available, Morningstar calculates a P/S of 358.97 and a Price/Book of 4.355. The company’s EV is $2.98 billion. Taking the latest revenue figures, $6.65 million, this would imply an EV/Revenue of around 448.

At the moment, it is very hard to value this company, as it is not profitable and is growing at four-digit rates. However, we could try to compare the stock to Coinbase. The latter has a market cap of around $58 billion, with revenues of around $1.14 billion, an EV/sales multiple of 45 and a P/S of 15.85. Let’s take the P/S as a point of reference.

With $6.54 million in revenue and $141.41 million shares outstanding, Voyager is currently producing around $0.04 per share, implying a P/S of 575. Let’s say Voyager can maintain the recent quarterly growth rate of 4000%. This would mean revenues by the end of the year of $272 million, which assuming no dilution (this would be rare) would imply $1.9/share. At Coinbase’s P/S of around 15 this would give us a price target of $28.5. Of course, at such high growth rates, why not use a larger P/S? Other companies in the crypto space like Riot Blockchain Inc (RIOT) trade at over 100x their sales. Using 100 P/S for voyager would mean $119/share

I think anywhere from $28.5-$119/share is a reasonable price that could be achieved in the next 1-2 years. The difference in price and time will be determined by the eventual growth and multiple applied, and also the level of dilution. Fellow SA contributor, Singular Research, for example, predicts revenues of $117.5 million in FY 2021 and arrives at a PT of $23.50.

Takeaway

Whether it takes one, two or ten years, it is clear that this company will achieve millions if not billions in revenue one day. Profitability will be achieved, as we know from Coinbase that this is possible, and at today’s price of $22.23/share, the downside seems limited, while the upside could be huge. Voyager will certainly have to deal with competition from other exchanges, and even traditional banks, but for now it is leveraging what is akin to first-mover advantage, and we should see this stock take-off together with the whole crypto market.

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.