Description

This is an interesting one that could be appealing to all the legion of crypto-currency enthusiasts that no doubt are also members of VIC. The idea started as something of a joke but after seeing STX’s move yesterday (up 7% on an unconfirmed blog post that they owned 4% of Ripple), I think maybe this idea isn’t so silly. Amidst all the crazy stock moves in penny stocks that add “crypto” into their names, there is one real company that is also exposed to this space that hasn’t moved nearly as much: SBI Holdings (8473:JP).

SBI is something of a cross between a traditional retail broker/asset manager and a VC fund and they operate in 3 segments; Financial Services, Asset Management and Biotech:

In preview though, SBI is a pretty decent Japanese financial co that isn't particularly expensive and may be very cheap if you think Ripple/XRP is valuable and not a bubble.

Financial Services (72% of revenue and non-biotech EBIT):

Securities business (~51% of segment revenue and ~75% of segment EBIT): They are the 5th largest broker in Japan and the largest online broker and they have been taking share from traditional brokers.

They also have been growing their investment banking business and have actually been the 5th largest lead underwriter on IPOs over past few years (they are involved in almost all IPOs in some capacity)

Banking related business (28% of segment revenue and ~25% of segment EBIT). Which is a traditional (online) deposit taking bank called Sumshin which has been growing quickly and has ~4.5Tn JPY in deposits. They also do some insurance.

Asset Management Business (27% of revenue and 28% of non-biotech EBIT):

Operates/manages several VC funds including corporate VC funds on behalf of other Companies (ie Nikon or Mitsui give them money to invest in segments relevant to the parent). They also have fintech related investments including the crypto angle here-an 11% stake in Ripple (see below).

Biotech related business (1% of revenue and negative EBIT):

A bunch of lottery tickets but no idea how/why they have any competitive advantage in this space.

SBI trades at ~ 18x NTM EPS and 10x EBITDA. For a brokerage business like this, the valuation is pretty undemanding (perhaps their best comp, Monex trades at 20x EPS and ~13x EBITDA.

Ripple:

Ripple has been the best performing crypto-currency over the past year and now has the 2nd largest “market cap” among crypto coins. Ripple is actually a protocol and Ripple uses a coin called XRP for their current offering but theoretically Ripple can be offered without XRP (from my lay understanding, the use case for Ripple ex XRP is better than the coin itself).

Ripple differentiates itself from coins like Bitcoin by being A) less decentralized and B) easier to transact in. With regards to A), Ripple is a private Company and that therefor grants them more control over the ecosystem. This leaves some of the more libertarian members of the crypto-world miffed but does seem to have gotten more tentative buy-in from financial institutions than the wild west of Bitcoin. It’s also worth noting that XRP addresses some of the main pain points for Bitcoin (clearing times of 4 sec v 1 hour, 1500 transactions/second v 6 and a transaction cost ~$0.0003 (~1/1600 of Bitcoin).

SBI has been using Ripple for a remittance service bw Japan and Thailand and plans to add other geographies in the future while ~100 financial institutions are trialing the Ripple protocol in some capacity (inc BAC, WFC, C and other global mega-banks).

In the hype fueled market that has swept up crypto-currency, each XRP is ~$3 (this number could be $1 or $10 by the time I post this idea). There are 100Bn XRP that have been (or will ever be) created. 38Bn are distributed and circulating, while the remainder are effectively controlled by Ripple (55Bn in escrow and 6.7Bn actually held by the Co). At $3, Ripple controls $185Bn worth of XRP. At this seemingly absurd valuation, SBI’s stake is worth $20Bn (almost 4x SBI’s entire EV). And that ascribes no value to the protocol itself which seems like it ought to be worth more than the currency (realistically bc the currency seems overpriced but who am I to argue with the wisdom of crypto-crowds?).

Regarding STX, the stock added $1Bn in market cap yesterday on a blog post saying they own 4% of Ripple while SBI definitely owns 11% of Ripple and has an EV ~$6Bn.

Catalyst

John McAfee starts pumping XRP?