By Michael Kim
OTC:DEFTF
READ THE FULL DEFTF RESEARCH REPORT
We are initiating coverage of DeFi Technologies Inc. (OTC:DEFTF) with a 12-month price target of $3.00, translating into sizeable upside from the stock’s current price. DeFi Technologies Inc. (DEFTF) is a diversified technology company primarily focused on the digital assets/decentralized finance ecosystem. DEFTF provides digital asset-focused asset management, infrastructure, and research services, while the company’s venture capital business invests in early-stage decentralized finance and Web3 companies.
Our investment thesis revolves around DeFi Technologies’:
1. Diversified Platform Focused on Digital Assets, DeFi, and Web3: DeFi Technologies’ mission is to provide investor access to and capitalize on the innovation, value, and high growth of leading decentralized technologies primarily through introducing and managing digital asset ETPs, as well as identifying, investing in, and developing companies focused on the decentralized finance and Web3 ecosystems. Stepping back, decentralized finance (DeFi) applies the model of digital assets (decentralized blockchains to validate and track transactions/ownership) to the world of traditional financial services. Decentralized applications (dApps) run on public blockchains and provide financial services without centralized gatekeeps/toll takers. As a result, decentralized finance apps provide banking, borrowing, lending, trading, and insurance (amongst other services) within a more accessible, timely, cost efficient, secure, and transparent platform. Web3 takes the concept a step further and applies the decentralized blockchain groundwork to the internet.
2. Crypto Going Mainstream: To be sure, the biggest news to hit the crypto industry this year (or for many years) was the SEC approval and subsequent launches of 11 Bitcoin (BTC) Exchange Traded Funds (ETFs) here in the U.S. in January. Beyond record-breaking asset growth, the BTC ETF introductions garnered massive media attention/exposure, with a favorable narrative developing for the crypto industry more broadly. In turn, rising awareness and demand combined with improving accessibility continues to drive higher adoption/allocation rates across the digital assets landscape.
Despite the surge in demand for cryptocurrencies via BTC ETFs, a majority of Bitcoins remains held by retail investors. The key to a step function in growth remains rising crypto allocations from institutional investors (pensions, Sovereign Wealth Funds, insurance companies). While we are still seemingly in the very early stages, a sustainable Bitcoin bull market likely facilitates a shift in institutional allocations. We expect BTC and other cryptocurrencies to continue to broadly outperform more traditional asset classes over time reflecting several powerful tailwinds/catalysts including ongoing ETF inflows, a more favorable interest rate backdrop (at some point), and slowing supply post the recent BTC halving.
3. ETP Headstart: DeFi Technologies’ subsidiary Valour Asset Management is a leading ETP issuer in Europe, with 19 single-asset and multi-asset class products currently in market. From a competitive positioning perspective, Valour focuses on niche markets, with investment performance track records and trading/issuance capabilities in local currencies across Germany, France, Amsterdam, and Scandinavia. Despite rising competition, Valour remains well positioned to continue to gain market share reflecting in-house management expertise, regulatory approvals to list ETPs on major exchanges across Europe, and a focus on Alt Coins like Binance (BNB), Solana (SOL), Ripple (XRP), Dogecoin (DOGE), Cardano (ADA), and Avalanche (AVAX), amongst others.
Looking ahead, we expect Valour ETP AUM to continue to grow fueled by ongoing new product development, with plans to launch approximately 15 new ETPs in 2024 followed by an additional ~30 ETPs in 2025. Incremental ETP launches likely extend beyond digital assets, with thematic and active strategies key areas of focus. Furthermore, management remains focused on broadening Valour’s geographic footprint, particularly in jurisdictions maintaining favorable regulatory frameworks and high crypto adoption rates (see the Middle East and Asia), via organic initiatives and/or strategic partnerships and joint ventures.
4. Supercharged Asset Manager Revenue/Margin Model: We are introducing 2024 and 2025 EPS estimates of $0.08 and $0.40, respectively, implying a meaningful inflection in profitability this year followed by considerable growth in 2025. Key modeling inputs include outsized revenue growth, as ETP AUM continues to build reflecting ongoing net inflows and market appreciation. Unlike traditional asset managers that rely almost exclusively on management fees to drive the top line (and are subject to ongoing fee pressures), DeFi Technologies generates revenue across multiple streams including staking, lending, and trading underlying digital assets in addition to ETP management fees. All in, DEFTF can earn 7%+ on ETP assets, with staking/lending yielding ~6.5% on top of management fees of 1.9% on most ETPs. Moreover, our model assumes operating income margins step function higher from ~30% in 1Q24 to 80%+ in 2025 reflecting limited expense growth, with senior executives remaining focused on increasingly leveraging a more efficient overhead structure.
5. Unsustainably Low Valuation: Despite what we believe to be conservative inputs/assumptions, our $3.00 DCF-derived price target suggests a wide disconnect between DEFTF’s fundamentals and the stock’s current price. Furthermore, we looked at peer valuation multiples to validate our DCF-based price target. While DeFi Technologies’ digital assets-specific business model, competitive positioning, and geographic footprint make apples-to-apples comparisons a bit more challenging, we believe comping DEFTF against asset managers with meaningful crypto ETF offerings is fair from a relative valuation perspective. On top of that, longer-term upward revaluation catalysts potentially include uplisting the stock to a senior U.S. exchange (though SEC approval remains elusive for crypto candidates more broadly), and/or partnering with a larger firm looking to acquire a foothold in crypto asset management or consolidate market share, particularly in Europe.
Our report provides a deep dive into DeFi Technologies’ diversified portfolio of digital assets, decentralized finance, and Web3 businesses providing differentiated products, services, and structures, the current crypto landscape, key growth drivers, and our financial model. In addition, we introduce the senior management team and walk through our valuation work including our DCF model assumptions and relative multiple analysis.The final section summarizes what we believe to be key investment risks specific to cryptocurrency volatility, the regulatory backdrop, competitive dyanmics, and DeFi Technolgies’ strategic partnerships.
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