By Michael Kim
OTC:DEFTF
READ THE FULL DEFTF RESEARCH REPORT
After the market closed yesterday (8/14/24), DeFi Technologies (OTC:DEFTF) reported 2Q24 earnings results. On an IFRS basis, DEFTF reported 2Q24 EPS of $0.20, well ahead of our $0.03 estimate. Net income totaled of $66.0 million for the quarter versus our $12.7 million forecast. Relative to our model, the EPS beat was mostly a function of higher DeFi Alpha revenue and lower weighted-average diluted shares outstanding, partially offset by above-forecast operating expenses (mostly trading bonuses).
We are taking up our 2024 EPS estimate from $0.12 to $0.27 after updating our model following 2Q24 earnings. Despite lower AUM as of 6/30/24 ($532 million versus our prior $607 million forecast) and further crypto price weakness QTD (our back-of-the-envelope math suggests Valour’s AUM are down a weighted-average ~7% since June 30, 2024, based solely on market depreciation), our higher earnings outlook primarily reflects: 1) the 2Q24 EPS beat; 2) more sustainable revenue from DeFi Alpha (management pointed to an incremental $14.1 million thus far in 3Q24, and we look for further gains as the business scales); and 3) higher revenue yield assumptions following the release of digital assets related to recent debt repayments and the early success of Valour’s BTC staking ETP. That said, our 2025 EPS estimate remains relatively unchanged at $0.50, with more favorable DeFi Alpha trading revenue forecasts offset by a slightly softer management fee outlook (on lower starting AUM) and higher operating expense assumptions.
Our valuation work reinforces our bullishness on the stock. After incorporating a lower discount rate in our DCF model given DEFTF’s improving risk profile, we are raising our price target by $1.00 to $4.00, implying meaningful upside potential from current levels.
We highlight the following key takeaways:
1. Multiple revenue levers to pull: At a high level, DeFi’s revenue model is built different. Unlike traditional asset managers that rely almost exclusively on management fees, DeFi generates revenue across staking, lending, and trading underlying digital assets in addition to ETP management fees. On top of that, DeFi Alpha’s proprietary trading desk is increasingly adding another powerful revenue driver. To be sure, management upped revenue guidance for 2024 from $87 million last quarter to $131 million. Our model calls for revenue to hit $146 million this year reflecting ongoing AUM growth and incremental DeFi Alpha revenues in 2H24.
2. Increasingly leveraging differentiated trading capabilities: On the 1Q24 earnings conference call in mid-May, management highlighted DeFi Alpha reported $40 million of revenue thus far in 2Q24. Since then, the specialized arbitrage trading desk booked an incremental $42 million through June 30, 2024, bringing the 2Q24 total to $82 million. Furthermore, DeFi Alpha generated $14.1 million in digital asset inventory in 3Q24 through mid-July.
Moreover, the company recently announced the signing of a Letter of Intent (LOI) to acquire Stillman Digital, a global technology and digital asset liquidity provider. The transaction further augments and diversifies DEFTF’s customer base and revenue opportunities. Indeed, Stillman generated $6.1 million of run-rate revenue in 1Q24.
3. Building crypto treasury/accelerating capital management: Following in the footsteps on MicroStrategy (MSTR), Block (SQ), and others, DEFTF recently adopted cryptocurrencies as the company’s primary treasury reserve asset to mitigate the effects of inflation and generate higher yields on excess liquidity. As of August 14, 2024, the company held 204.34 Bitcoins, 12,775 SOL tokens, and 1.48 million CORE tokens ($15.5 million in aggregate). In addition, the company maintained $40.9 million of cash and USDT on the balance sheet.
Turning to capital management, the company repaid an incremental $10 million of outstanding loans in June following a repayment of $19.5 million in May. As of June 30, 2024, remaining loans payable stood at $13 million. Moreover, management remains committed to share repurchases, with the Board likely to consider instituting a dividend at some point down the road.
4. Extending asset management product/distribution footprints: Despite stepped up crypto market volatility during 2Q24, we put net inflows at ~$15 million for the quarter (split about evenly across April, May, and June), translating into a strong 9% annualized organic growth rate (with a further $6.8 million of positive net flows in July). Looking ahead, ongoing product development further diversifies AUM and likely enhances the trajectory and sustainability of net inflows. New product development remains a strategic priority, with plans to launch approximately 15 new ETPs this year followed by an additional ~30 ETPs in 2025. Recent launches include ETPs tracking CORE, Hedera, and NEAR tokens. Moreover, Valour recently announced the signing a Memorandum of Understanding (MOU) with the Nairobi Securities Exchange (NSE) and SovFi Inc. to launch digital asset ETPs in Africa, complementing management’s ongoing focus on broaden the company’s geographic footprint in the Middle East and Asia.
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