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“The Next Carvana”: Why I’m Long DeFi Technologies: DeFi Technologies ($DEFTF on the pink sheets or DEFI in Canada) is a small cap stock domiciled in Canada which operates 23 crypto-related Exchange-Traded Products (ETPs) in Europe. As of May 31st, they had $620M in AUM (all dollars refer to USD). They make a yield from their AUM (via management fees and staking) and opportunistic trading profits. Some of their highest yielding ETPs are the non-Bitcoin or Ethereum (i.e., alt coins) cryptocurrencies such as Solana. Bloomberg consensus is that they will do $104M in revenues this year and $81M in net income (78% net margins); then $143M in revenues in 2025 with net income of $125M. Yet, on their May 21st earnings call, management said they estimated their 2024 revenue would average 8 - 10% yield of their AUM annually. Therefore, at a 10% yield given current AUM of $620M, they will earn $62M in yield (management fees and staking revenue) in the next 12 months. However, they also said on that earnings call that they now expected to generate trading profits of $15M a quarter or $60M a year going forward. Their DeFi Alpha unit has generated $83M in revenues so far in Q2 according to their June 3rd release. Let’s assume that they can generate $80M a year in trading revenues. Together with their yield revenues, that’s a combined revenue run rate of $142M a year. Additionally on their earnings call, they stated that their operating costs including debt servicing (which has been reduced by $25M in the last month) is about $10M a year. This suggests they now have an annual earnings of $132M a year which is much higher than the Bloomberg consensus or their recent historical financials. Additionally, their cash on hand when they announced their stock buyback to commence on June 7th was $52M up from $7M on March 31st. And their private venture portfolio on May 21st was valued at $31M. On June 10th, they announced that they’d purchased 110 BTC valued today at $7M (presumably using their cash on hand) and planned to do more of this going forward. This would put their cash, BTC and private assets net of debt at $70m currently. On June 7th, they announced they would commence a stock buyback on June 10th to purchase a maximum of 27M shares outstanding which, after completion, would take the share count down to approximately 250M shares. As of June 11th, Robinhood’s ($HOOD) 2024 forward P/E multiple was 43.5x and Coinbase’s ($COIN) was 34x. Blended this is 39x forward P/E multiple which should be applied to DeFi to value the company. If you use 250M shares and management’s implied (but not official) 2024 earnings number of $132M with a 39x forward multiple, and include the $70M in net cash, you get a current implied share price today of $20.87/share instead of $1.60, suggesting the stock is currently valued at 1/13th its fair market value. However, keep in mind that there are 2 key additional ways for the company to increase its value in the near term: (1) the price of cryptocurrencies in general could increase, increasing the value of DeFi’s AUM and therefore its yield; and (2) on the recent earnings call, management discussed geographic expansion into Middle East North Africa (MENA) and Asia either on their own or via a joint venture to increase distribution for their ETPs. Here’s how both could work in practice: (1) If the price of Bitcoin increases by the end of the year to $150,000 from $67,000 today (as Tom Lee of @Fundstrat predicts and which I happen to agree with but every investor will have a different opinion), the value of DeFi’s European AUM would (without any net inflows) increase from $620M to $1.39B (this probably understates it because, if BTC increases that much, the likelihood is that alt coins which DeFi focuses more on and which drives higher yields would increase more than that). Therefore their 10% yield would be $139M instead of $62M in terms of annualized revenue. Adding $80M in trading revenue to this and netting out the $10M in operating costs, you would have earnings of $209M implying an end of year stock price for DeFi of $32.88/share vs. $1.60 today. However, by the end of the year, the market would be applying a 39x forward multiple to the 2025 earnings number so it could be higher than that. (2) Assuming DeFi decides to expand via a joint venture with a local partner in MENA and a separate one in Asia, this would be a faster path to generating yield and raising assets. But the cost of quickly generating revenue would be giving up something like half of the economics to the local partner. Potentially DeFi can launch new products in those geographies and raise AUM to quickly get to $1B in MENA and $1B in Asia. That would suggest DeFi would get another $100M in annualized yield revenues from both geographies net of what they’d share with their partners. At current crypto prices, that would suggest a per share price for DeFi of $36.47/share by later this year or $48.48/share with the same elevated crypto prices applied to the European AUM described above. The bottom line is that there is a reasonable scenario (if you think BTC doubles in value over the rest of the year) that DeFi could trade at close to $50/share by the end of 2024 as opposed to its current price of $1.60 (as of yesterday). That’s a potential 30x return. A simpler scenario says it should simply be worth 13x more today than where it currently trades. Finally, keep in mind that it currently trades on the pink sheets in the US. If it trades above $2/share for a sustained period, it has the opportunity to apply for an uplisting and attract a much more institutional shareholder base perhaps leading to this valuation gap closing faster. This would also lead to research coverage as well, something it currently lacks. After reviewing a tweetstorm by @APompliano earlier this year on why he was long DeFi and doing more investigation as well as running its metrics through our AI algorithm, I decided to take a long position in the company. We could decide to exit in the future but I don’t expect to for a while as long as such a valuation gap exists and some exciting potential catalysts this year. When I was on @TheCompoundNews & Friends podcast recently, @Downtown and @michaelbatnick asked me for “the next Carvana ($CVNA)” which I am currently long and have been long for most of the last year and previously mentioned on their podcast. Although it’s smaller and more speculative, the long in my portfolio which has the most upside potential and could be the next Carvana is definitely DeFi at the moment. Of course, do your own serious due diligence before jumping in to something like this. Don’t just take my word for it. [EMJ Capital and Eric Jackson personally were long DeFi at the time of writing. EMJ is also currently long CVNA and COIN.]