0db6d2bb-ec39-4879-aa81-0fae60939e63_Voyager-Digital-Premium-Analysis.pdf

Voyager Digital: Premium Analysis

Voyager Digital

Voyager Digital is a high-risk/high-reward opportunity that offers exposure to the Bitcoin and crypto trading trend. The company is part of a consortium for stable coins, including USD Coin (USDC) and Tether’s USDT, which in total have surpassed $7 billion in circulation. 

In other words, Voyager provides exposure to both decentralized coins (Bitcoin, Ethereum, Litecoin, Chainlink, etc.) and coins based on the fiat system. 

Big Tech and the Fed will push for stable coins based on the fiat system, while crypto enthusiasts and developers will want blockchain to remain decentralized. Although I am personally in the decentralized camp (you can read my Facebook Libra article here), I am also aware that the powers-to-be are likely to put immense pressure on adopting stable coins. This company allows exposure to both at a $2.15 billion market cap.

Voyager Digital strives to offer more coins than its competitors, including the $30 billion market cap Coinbase that is going public soon, Kraken and Gemini.

Voyager does not charge commissions on crypto trades and offers 9% interest on stable coins. We break down how this is possible below. 

Please note, the I/O fund does not hold large amounts of crypto on trading platforms. Instead, we do this in wallets and use trading platforms for trading only. We explain the nuances of why and various choices if you do want to hold coins in “hot storage.”

Below, we offer a thorough analysis of how Voyager stacks up against Coinbase and Gemini. Crypto-related stocks and assets are more volatile than others – although less so over the recent year. 

We think it's essential to go through this company thoroughly and how it stacks up to its competitors as anything crypto-related promises to be volatile — although less so over the recent year.  

Financial Overview

We published a quick blog on Voyager two days before the company released a substantial report on its recent growth, which can be found here. 

Voyager is on a growth streak fueled by the Robinhood issues and a rise in brand awareness from offering the meme-token Dogecoin. The company solves one of the more significant pain points for crypto investors, which is commissions. To illustrate, a $5000 crypto trade on Coinbase can cost as much as $80 ranging from 4% to 1.5% commissions. These are not small stock trading fees of $4.99. Although Coinbase was first to market, there is plenty of room for competitors to disrupt the non-existent customer service and excessive commissions. We discuss Gemini below as a better alternative to Coinbase if you do choose a commission-based platform. 

Voyager is FDIC-insured. However, the crypto held with Voyager is not insured. Gemini, which operates as a trust, has private insurance. For the most part, crypto investors (including ourselves) store their assets on a "cold storage" crypto wallet.

 The risk is minimal in this case in the event there is no insurance.

Significant Growth from Robinhood Tailwinds

Voyager reported roughly 400-500% growth from December to January and roughly 1000% growth from December to early February from the most recent report released in early February. Crypto is a tight-knit niche and we think word-of-mouth will grow nicely in this community as it actively looks for new platforms. 

In December, the company reported $1.7 million in revenue and has grown to $8.5 million in January of 2021, for roughly 600%. The company reported $2.5 million in revenue between February 1st and February 4th — which could lead to $17 million in revenue in February.

Assets under management (AUM) grew from $200 million in December to $800 million by early February.   

Trades per day averaged more than 30,000 for the month ending January 31st, up from approximately 6,500 in December of 2020, representing 450% growth in daily trade volume. By early February, daily trades averaged 60,000 trades per day or nearly 1000% growth.

In January, the value of customer trades increased over 500% to $840 million, up from $150 million in December of 2020. 

Over twelve months, the overall number of trades increased from 8,500 trades in December of 2019 to 1 million trades in January of 2021, an increase of 117,000%. This number may be irrelevant as most of this is priced in, yet we think it's important to look at the ongoing strength before the Robinhood issues.

Basic users grew from 150,000 in December to 440,000 by early February. The company has a pipeline of 80,000 customers the company is trying to onboard. 

Here is the management’s statement in full regarding the Robinhood catalyst and what investors can expect moving forward:

"While we believe our recent business metrics reflect the growing interest in the cryptocurrency ecosystem and long-term benefits of our business model, the unprecedented external events over the past week, including decisions made by competitive products, have brought significant upside to our metrics," said Steve Ehrlich, Cofounder and CEO of Voyager.  the unprecedented external events over the past week, including decisions made by competitive products, have brought significant upside to our metrics," said Steve Ehrlich, Cofounder and CEO of Voyager. 

"While we don't expect a repeat of the unprecedented external events of the past few weeks that have catalyzed the recent growth, we anticipate continued meaningful growth in our business, including from the pipeline of approximately 80,000 customers who have signed up and that we are presently onboarding.  While we don't expect a repeat of the unprecedented external events of the past few weeks that have catalyzed the recent growth, we anticipate continued meaningful growth in our business, including from the pipeline of approximately 80,000 customers who have signed up and that we are presently onboarding. 

We remain focused on executing our long-term business plan and expect Voyager will continue to grow the business in a more traditional pattern throughout the balance of 2021. To support this growth, we anticipate increased expenditures to materially increase our employee headcount during this period, while also growing our technology architecture stack in the near-term to accommodate significantly more users." expect Voyager will continue to grow the business in a more traditional pattern throughout the balance of 2021. To support this growth, we anticipate increased expenditures to materially increase our employee headcount during this period, while also growing our technology architecture stack in the near-term to accommodate significantly more users."

The company closed a private placement of $46 million on January 21st, 2021.

Per the Investors Presentation, Voyager has an ambitious goal of reaching $20 billion AUM based on $500 million AUM as of Q1 2021 (this was achieved and more so with currently $800 million AUM).

The presentation also points out that Voyager has seen 75%+ sequential quarter growth with increasing operating margins in 2020. The company also states it takes $35 to acquire an account, and the company makes $30 per account in monthly revenue – which is excellent unit economics. 

According to Stifel Research, the customer acquisition cost has averaged $20 to low $30s per new account. In contrast, monthly revenue per account has accelerated to $80/month in C2021 from $40/month at the calendarend of 2020. 

You can read a catalog of research reports from various funds and analysts covering the company, which might help see the fairly extensive coverage considering the company's small market cap.

Voyager is a strong choice for alternative coins as the app allows you to trade many tokens that Coinbase or Kraken does not support. Dogecoin, for instance, which is a meme coin pushed by Elon Musk is offered on Voyager. The company offers interest on Bitcoin, Ethereum, Polkadot and Chainlink. 

Quarterly Financials 

Fiscal Q1 2021 results were reported on November 30th for the period ending September 30th.  The company had

$2 million with $1.6 million in fees and interest income of $400,000. There was a net and comprehensive loss of $3.97 million or ($0.04) EPS. 

The company had cash and cash equivalents of $7.48 million and debt of $1.12 million at the last earnings report, which includes a PPP loan. 

There was an update for fiscal Q2 2021 on January 5th with quarterly revenue expected to reach $3.5 million. 

Voyager also completed a private placement during the quarter, which increases gross proceeds raised during fiscal 2021 to C$13.8 million. It completed the acquisition of LGO, SAS, an AMF regulated entity that provides Voyager with a fully licensed European entity to accelerate its European strategy.

How does Voyager Make Money?  

Voyager’s revenue is not dependent on commissions or fees. The company plans to introduce a debit card, credit card, margin, loans, and advisory products over the next year or so. 

Right now, the business model creates revenue in two specific ways:

1)      Smart Order Routing: When you place an order to buy or sell a cryptocurrency, they will provide a listed price at which you accept. They will then connect your order to 12 exchanges. Unlike securities, which by law, must have the same price across all domestic exchanges, cryptocurrencies are priced at variable levels. In other words, the same coin can be listed at two different prices at the exact same time. 

Voyager uses your order to capitalize on this inefficiency by performing an arbitrage across various exchanges. The profits from such a move would typically surpass any commission or fee, allowing them to provide exceptional pricing. Voyager will thus share the profits from this arbitrage with you in an attempt to execute your order at a lower price than you agreed to.

This specific business model will likely remain profitable until either regulations change or there is too much competition in the arbitrage. Changes to the process would appear in the margins.

2)      Voyager also operates like a bank. In their terms and conditions, they very clearly state “We will lend, sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of funds and cryptocurrency assets to counterparties, and we will use our commercial best efforts to prevent losses.”  

Basically, if you receive a loan from a bank, the loan is used by the bank as collateral for other investments. This creates multiple derivatives on a single asset. 

This piece is similar to Robinhood in that the users take on counterparty risk. Should Voyager become insolvent, you will need to stand in line behind other creditors to receive your money back.

For taking on this risk, Voyager offers significant yield in a yield-starved economy. Like a bank, a minimal deposit must be kept to receive this interest payment, which can be as high as 9%. As part of this program, it may take up to 7 days for you to withdraw any crypto from your account.

Voyager Digital is engaging in fractional lending practices, which banks have been doing for centuries. However, unlike banks, Voyager is not considered a bank or a broker-dealer, so it does not provide FDIC or SPIC insurance for your crypto if there is a run on the bank, per se, or if something occurs that would prevent them from meeting obligations. 

To conclude, FDIC insurance applies to the cash you hold at Voyager, but there is no insurance for the crypto held there. 

Catalysts: Stablecoins and Global Expansion

Last March, Voyager acquired Circle Internet Financial’s trading app which gave them a boost of 40,000 clients. The acquisition strengthens Voyager in offering the USDC stable coin that has $7 billion in circulation. Circle is backed by Goldman Sachs and is the founder of the consortium for USDC. The USDC coin allows global transfer of dollars at an instant and for a very low transaction cost. The stable coin is part of a consortium that is also sponsored by Baidu, IDG Capital and Bitmain with participation on trading apps, such as Voyager and Coinbase. The supply of USDC has grown by 41% since the start of 2020.

A recently announced acquisition of France-based digital asset exchange LGOUY expands Voyager Digital’s reach into 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.

Valuation

If we assume Voyager has doubled its revenue to $5 million (which we think is a very low estimate), the company is trading at a forward P/S of 100. There's a possibility that Voyager reports a 400% sequential increase due to the numbers presented above. 

If so, Voyager is trading at a forward P/S of 50 if we assume $40 million in revenue for FY 2021 at a $2.15 billion market cap. It is plausible that Voyager will achieve this with the critical metrics provided on February 5th.

This is obviously a very high forward P/S but we think its growth will continue at an attractive trajectory due to the information presented above.

Management:

In our brief blog last week, we mentioned that the management checks out and we don't see any flags there. The CEO, Stephen Ehrlich, has experience running brokerages and financial companies. He was the CEO of E-Trade Professional Trading arm before it was bought out by Lightspeed and was then the CEO of Lightspeed Financial, the CEO of PennTrade and CEO of Tradier.

Oscar Salazar is a Co-founder and he was early in Uber as the CTO. The one issue that I do see is that they are involved in another company called Pager, a digital health startup. I prefer a founding team that has only one focus.

Risks:

It would not be a proper analysis on a crypto exchange unless we discussed the risks involved. Hacks that result in a loss of assets are no longer as likely due to enhanced security measures and custodians, yet it bears mentioning that Mt. Gox was hacked in 2014. 

At the time of the hack, Mt. Gox was the largest crypto exchange globally, handling around 70% of all transactions worldwide, totaling $3 billion. The hack resulted in a loss of about 6% of all bitcoins in existence at the time. The company went bankrupt as all remaining assets were frozen. An investor who held their crypto at the Mt. Cox exchange lost most, if not all, of their investment.

Voyager Digital was hacked as recently as December of 2020, but no customer data or assets were lost as the company shut down its systems when the vulnerability was detected.

Since then, most major exchanges like Coinbase and Gemini have become custodians, addressing the security risks. Coinbase, for example, keeps 98% of cryptocurrencies held in cold storage, where it is held securely offline. The remaining 2%, which are held in hot storage, comes with insurance. 

Gemini takes these security features a step forward. Being classified as a trust, Gemini adheres to strict fiduciary capital reserve and cybersecurity standards by one of the toughest financial regulators, the New York Department of Financial Services. They further secured the SOC for Service Organizations Type 1 examination typically reserved for the most stringently run financial services or technology firms.

A SOC 2 review from an independent, third-party like Deloitte validates that Gemini is holding itself to high security, availability and confidentiality standards. Because of these additional measures, Gemini has become a favorite exchange/custodian for intuitional investors. 

As mentioned above, cryptocurrencies do not come with FDIC or SPIC insurance. FDIC protects depositors from banks becoming insolvent, providing guaranteed insurance of up to $250,000. The SPIC protects investors from a broker-dealer going bankrupt, providing insurance up to $500,000 in the unlikely occurrence of a broker-dealer becoming insolvent.

Counterparty risk is a reality for any crypto investor holding their coins at an exchange/custodian. If a custodian does not segregate coins and provide unique private keys that the company cannot access, the risk remains that an investor could lose a portion of their coins in the event of insolvency.

This happened to BitGrail in 2019, an Italian exchange. The courts declared that because all crypto deposits were directed towards the primary address of the exchange, and were not segregated, it was impossible to determine the coins' ownership. Thus, the remaining coins were used to pay off creditors, wiping out most of the individual investors using that exchange.

To be clear, we don't think this will happen with Voyager but are providing a 360-degree view of the risks. We think the crypto landscape has become much more secure since Mt. Gox and BitGrail, and these old stigmatisms prevent many investors from participating in this sweeping trend.

Coinbase, for example, clearly states that they do not segregate coins and control all private keys. In their terms and conditions, they say that "Coinbase may use shared blockchain addresses, controlled by Coinbase, to hold

Digital Currencies held on behalf of customers and/or held on behalf of Coinbase." 

On the other hand, Gemini does segregate coins and states that not even the founders, CEO or president can access coins held in cold storage. They are further in the process of securing privately backed FDIC-like insurance for further protection and safeguards in the unlikely case of insolvency. 

Also – please note, Voyager Digital is a thinly traded over-the-counter (OTC) stock. The OTC markets come with higher risk as there are no central brokers compared to stocks traded on the Nasdaq. 

Voyager promises to be a roller-coaster ride as a small-cap OTC stock that is tied to crypto moves. 

Conclusion:

Voyager Digital's growth is largely undetected by the market at this time and we think this is a boon to our readers. With Goldman Sachs leading the IPO, Coinbase will be fully priced by the time it hits the market. Coinbase's IPO is expected this year at a $28 billion to $32 billion market cap on the low end with some Silicon Valley insiders suggesting it will reach $70 billion to $100 billion (I won’t a buyer of those crumbs … cough .. I mean at that price). This is at annualized revenue at $2.3 billion ($600 million a quarter) or a P/S of 50. 

Yet, there is now a competitor (Voyager) undercutting them on commissions and on the breadth of tokens. For most crypto investors, the process of holding tokens securely in cold storage is second-nature, and therefore, Voyager Digital is likely to be very popular despite the lack of insurance on crypto.

In our opinion, Voyager is a viable (or should i say formidable) competitor to Coinbase. For our goals and desired gains in the I/O fund, we will take the 50 forward P/S on a company growing 500% right now and small market cap rather than an overpriced IPO demanding the same valuation. Eventually, Voyager’s growth will settle but we think the value proposition of undercutting Coinbase on commissions will continue to help the app take market share in the word-of-mouth community of crypto traders. 

Gemini does well for the high-dollar crypto traders, but this is not the same crowd as Voyager Digital, per se. We see Voyager Digital as a competitor to Robinhood and Coinbase at an attractive market cap. We like the management and the diversification with stablecoins as the Fed and Big Tech are likely to support stablecoins as time goes on. Therefore, Voyager offers exposure to both and has global expansion on the horizon.