What are we looking for?
Bitcoin, often touted by its supporters as an investing hedge in turbulent times, is in the midst of what many call a “crypto winter,” or extended downturn. Today we look at valuations for Canadian-listed crypto- or blockchain-related stocks for a sense of how this so-called hedge is performing.
We used StockCalc’s screener to select the top 10 crypto or blockchain-related stocks by market capitalization on the TSX and TSX Venture Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
If we have analyst coverage, we look at the consensus target price.
More about StockCalc
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What we found
In Canada, this sector comprises companies engaged in services such as finance and trading platforms or cloud, infrastructure and mining activities connected with crypto or blockchain. In the past two months, the industry has been hit with bankruptcies (Celsius Network LLC, Voyager Digital Ltd.), layoffs (Coinbase Global Inc., Gemini, BitPanda GmbH), and assets frozen at numerous firms.
The accompanying table shows the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and analyst target data if used.
Our modelling showed a positive DCF value for those with positive cash flow and generally high ABV values compared with price. We also see analyst targets are more bullish than our models. It is important to stress these are small capitalization stocks with extremely volatile returns, and none pays a dividend.
Until this screen, I was not aware of just how correlated these stocks are to crypto prices. We have seen bitcoin’s price drop from more than US$68,000 to about US$22,000, having hit a low of US$17,708 recently. The stocks in the screen have also been beaten down – some at an even higher rate than the fall in crypto prices – hence they all appear undervalued.
Bitcoin’s value as an economic or investing hedge is dubious: Its price movement in the past three months is moving roughly in line with the broader equity markets, and its daily price volatility is more than twice that of the Nasdaq.
Let’s look at a couple of these companies:
Vancouver-based Hive Blockchain Technologies Ltd. focuses on the mining and sale of digital currencies with an emphasis that it uses 100-per-cent green energy to mine crypto. I ran our valuation models for Hive and also ran its closing price against the price of bitcoin in a regression analysis to look for a relationship between the two. (Regression analysis looks at how one or more variables – bitcoin in this example – affects or explains the variable we are interested in – the stock price.) The three- and 12-month regressions had correlations of 0.90 and 0.93, which tells us the price movement in Hive is at least 90 per cent explained by the underlying price of crypto.
Our valuation modelling generally supports the stock price, with our DCF below the current price and other models well above.
Mogo Inc., also based in Vancouver, is a financial technology company that offers personal loans, crypto, mortgages and credit scores. Mogo’s nod to sustainability is to plant trees to offset CO2 emissions created from mining bitcoin. All our models except DCF show significant upside for the stock. Our DCF model is negative, given we cannot yet see out to positive cash flow. This is due in part to the company’s current focus on growth over profitability.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Full disclosure: The author currently owns shares in Mogo.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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