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To investors,
The Sohn Conference was yesterday. This unique event brings together some of the world’s greatest investors to pitch their best investment ideas, while helping to raise money for philanthropic causes.
From their website: “The Sohn Conference Foundation takes a unique, selective investor’s approach to grant making. The Foundation supports cutting-edge research, innovative technologies, and bold initiatives that will have the greatest impact in treating and curing today’s public health priorities.”
Some of the picks from yesterday’s conference included Carpenter Technology Corp. (NYSE:CRS), Natera Inc. (NASDAQ:NTRA), European chemicals company Solvay, and cryptocurrency Ethereum.
Each of these picks has a solid thesis behind them, but I think they will be drastically outperformed by the stock that I would have pitched yesterday if I was at the conference.
My pick would be DeFi Technologies, Inc (NEO: DEFI) (GR: R9B) (OTC: DEFTF).
Let me explain my logic. The publicly-traded company has a few different products or services across the cryptocurrency sector, but there is one area that is worth truly understanding.
DeFi Technologies has a subsidiary called Valour Asset Management. This organization’s strategy is to create ETPs in non-US markets for the long-tail of cryptocurrency assets. The thesis is that investors in traditional markets and on Wall Street want exposure to potential 10x - 100x opportunities just as much as the degens of crypto do.
If Valour can be the first company to provide public market exposure to these assets, they will be able to attract meaningful capital to their ETPs. But that is when things get interesting.
Because Valour is holding crypto-native assets in these ETPs, they are able to generate higher fee revenue from these assets. Instead of charging less than 50 basis points as we are seeing for the bitcoin ETFs in America, Valour charges 1.5% or higher to manage the more esoteric assets. Additionally, many of the assets give Valour the ability to generate yield from staking or other crypto-native revenue opportunities. Lastly, Valour periodically engages in market-making for these assets which can generate additional fees.
By my calculation, Valour’s average fee generation on their AUM is approximately 7.2%. That is a monster number for the asset management industry.
This understanding alone would make DeFi Technologies and Valour an interesting potential investment. But you have to remember that these ETPs they manage are holding crypto assets, with Solana being their largest ETP, so the asset values continue to grow rapidly during a bull market.
For example, here is an excerpt from the company’s recent earnings report:
“Assets Under Management ("AUM") grew 476% to approximately $508 million as of December 31, 2023, up from $106 million as of December 31, 2022. Valour Inc. and Valour Digital Securities Limited's ("Valour's") current AUM stands at C$880 million.”
That means Valour’s AUM has grown more than 800% from December 2022 till today. There are very few businesses in the world who can see this type of revenue acceleration without having to expend an insane amount of money on sales and marketing.
As of this morning, the current market cap of the DeFi Technologies is about $140 million USD. That may seem reasonable on the ~ $10 million they reported for 2023.
There are two points that may change the way to look at those numbers though. It appears that more than 75% of those revenues were created during the last 90 days of the year. Additionally, given the ~ $650 million USD in current AUM, that would imply an annualized revenue run rate of $46.8 million.
Why is $46.8 million an interesting number?
That is the exact number that DeFi Technologies shared as the forward guidance for 2024 revenue. Here is the excerpt from the earnings report:
“Given the current AUM, price of digital assets and activity level in the digital asset market, the Company's annualized top-line revenue is forecasted to be approximately C$63.3 Million (USD 46.8 million) for 20241. Growth in AUM is expected to lead to proportional increases in revenue. Since there is a strong correlation between the Company's revenues and the digital asset market's price levels and activity, revenue trajectories will fluctuate with market conditions, while costs remain stable, reflecting Valour's business' scalability.”
An important note is that DeFi Technologies has a venture portfolio on their balance sheet that is currently marked at slightly over $32 million USD, so the business is essentially being valued today at approximately 2.5x this year’s revenue.
I am not a mathematician, but that seems insanely cheap for a company that is seeing revenue grow hundreds of percent.
Lastly, if we assume that crypto assets will continue in a bull market through the end of the year, DeFi Technologies becomes even more interesting. Let’s say that asset prices simply double from here through the end of the year, then you can conclude (based on the prior assumptions around AUM and fees) that DeFi Technologies would be doing close to $100 million annualized revenue run rate in that scenario.
My best analysis is that this stock is wildly undervalued at the moment and given the sector that it operates in, along with the products that it has in the market, there should be strong tailwinds through the rest of this year.
I think there were some strong pitches at Sohn yesterday, but there are strong odds in my personal opinion that DeFi Technologies will outperform all of them.
Before I let you go, I want to lay out a few disclaimers. I personally own DeFi Technologies stock. A company that I am a majority shareholder in also holds DeFi Technologies stock after we sold Reflexivity Research to the organization earlier this year. Some people may look at today’s letter as me talking my book, which has a hint of truth to it, but I think of it much more as I have skin-in-the-game and stand to lose money if I am wrong in my analysis.
Please don’t take today’s letter as investment advice. Do your own research. You all are adults who can think independently and critically. Stocks are wildly volatile, they can go up and down a lot, you can lose your money investing in the market, and nothing I have written here should be used by you to make investment decisions. No one, including me, is right 100% of the time.
It will be interesting to see how this letter ages over the coming months. Hope you all have a great day. I’ll talk to everyone tomorrow.
-Anthony Pompliano
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Cathie Wood is the Founder & CEO of Ark Invest. This conversation was recorded at Bitcoin Investor Day in New York.
In this conversation, Cathie talks about why she is so bullish on bitcoin, ETFs, macro factors, price target of $1.5 million, areas in the industry she is excited about, and more.
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Cathie Wood: Bitcoin Could Reach $1.5 Million
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The Stock I Would Have Pitched At The Sohn Conference