Bernstein Initiates SharpLink Coverage With Outperform Rating for Ethereum Treasury

Analysts at investment firm Bernstein initiated coverage of SharpLink Gaming with an “outperform” rating on Thursday, saying the Ethereum treasury firm’s shares could nearly double as the Federal Reserve lowers borrowing costs.

Bernstein analysts issued a price target of $24 per share for SharpLink, representing an 80% increase from current prices. The firm’s shares recently changed hands around $13.08, after peaking at $124.12 earlier this year, according to Yahoo Finance.

“We expect SBET to emerge as a compliant-first-institutional focused investment vehicle to access Ethereum as an investment and yield-generating asset,” the analysts wrote. “As we head into a lower rate regime, we expect significant investor appetite for SBET’s ability to deliver a sustainable Ethereum yield over the industry Ethereum staking yield.”

Like Strategy, the world’s largest corporate holder of Bitcoin, SharpLink seeks to grow the amount of cryptocurrency that it owns per diluted share to maximize value for shareholders. SharpLink currently owns 859,400 Ethereum that was recently worth $12.65 billion.

Unlike Bitcoin, Ethereum can be natively staked, allowing anyone to earn rewards by participating in the process of validating transactions. That’s one factor making Ethereum “ideal for a digital assets strategy,” they wrote, along with the asset’s robust liquidity.

“Ethereum’s sustainable native staking yield (and other blockchain based yield opportunities) allows a digital asset treasury model to build sustainable operating earnings from the core treasury strategy over and above the capital market funded acquisitions,” they wrote.

Bernstein highlighted SharpLink’s management team, including its Chairman, Ethereum co-founder Joseph Lubin, who also created Consensys, the firm behind MetaMask. (Disclaimer: Consensys is one of 22 investors in an editorially independent Decrypt.)

SharpLink’s management team is “strongly aligned with the Ethereum ecosystem,” the analysts noted. Earlier this week, SharpLink signaled it would eventually deploy $200 million worth of its Ethereum holdings into Ethereum layer-2 Linea, which Consensys created. 

The company said that would allow them to generate enhanced yield, which includes rewards from securing EigenCloud Autonomous Verifiable Services through a process known as restaking.

“This will likely enable them to generate incremental yield from multiple sources,” Bernstein analysts wrote. “Over the long term, we believe, SBET’s differentiation could result in more sustainable economics and greater ability to tap institutional debt and equity markets.”

‘Significantly Undervalued’

Although SharpLink can grow its Ethereum holdings sustainably through staking and associated activities, a common tool among its competitors hasn’t been consistently available.

Most treasury firms grow the amount of crypto that they own per share by issuing common equity. When a company’s shares trade at a premium relative to its crypto holdings, the move allows firms to grow their holdings by capitalizing on the difference.

Oftentimes, this premium is referred to as mNAV, or multiple-to-net asset value. Some view this metric as indicative of investors’ faith in a company’s vision for delivering on its strategy, whether that involves Bitcoin, Ethereum, or other digital assets.

Bernstein’s price target indicates a 15% premium to its crypto holdings, reflecting an ability to generate yield at a compound annual growth rate of 3.4% over the next decade. It also captures 2.4% yield from Ethereum and 1% from Ethereum and share purchases, they wrote.

On Thursday, SharpLink had an mNAV of 0.88, according to Strategic Ethereum Reserve. That means the company was valued at a 19% discount relative to its crypto holdings.

“We believe the premium to SBET’s ETH NAV is justified, driven by its ability to use leverage and ETH staking yields,” the analysts wrote, while acknowledging that market sentiment could also play a role and lead to fluctuations in SharpLink’s share price.

The company’s stock price plummeted 70% earlier this year after a registration-of-shares filing was deemed effective by the SEC. At that point, investors that funded the company’s pivot away from gambling marketing had the opportunity to sell their shares.

Last month, SharpLink repurchased one million shares for $32 million, saying it believed its common stock was “significantly undervalued” in the market. In August, the company said it had gained approval to repurchase up to $1.5 billion worth of common shares.

Eventually, SharpLink could issue its own debt, mirroring Strategy, Bernstein analysts wrote. The Bitcoin-buying firm has historically issued convertible debt as a way to accumulate more of the asset and effectively take on leverage.

“We expect SBET to continue to deploy share buybacks to fill the discount gap,” they wrote. “We [then] expect SBET to gradually scale its debt strategy, as SBET share value stabilizes relative to its Ethereum NAV.”

Ethereum was recently trading at about $3,780, down 5.3% over the past 24 hours. It is up 13.5% year-to-date.

In a Myriad prediction market, just 7% of respondents believe that SharpLink will hold more Ethereum than BitMine Immersion, which currently has the largest ETH treasury. Myriad is a unit of Dastan, the parent company of Decrypt.