SharpLink Gaming (NASDAQ:SBET) spent most of its history as a marketing business that focused on the sports betting market. Earlier this year, however, the business took an unexpected turn when it decided to pursue an Ethereum treasury strategy that would allow investors to gain publicly-traded exposure to ETH. In the short period of time since then, SharpLink has become the largest public holder of ETH. Is SharpLink Gaming stock a buy, or is its new ETH-focused strategy too risky for investors to swallow?
Why SharpLink Wins with ETH Treasury
There’s little doubt that SharpLink Gaming has secured something of a first-mover advantage when it comes to creating a publicly-traded ETH treasury. While there are spot Ethereum ETFs available, SharpLink’s more active management and staking strategy could prove to be more attractive for crypto investors than a fund that simply offers exposure to ETH.
SharpLink has also built a team that gives its treasury strategy considerable credibility. Chief among these is Chairman Joseph Lubin, who is one of Ethereum’s co-founders. SharpLink has also attracted talent from BlackRock in the form of Joseph Chalom, an executive officer who worked heavily on digital assets during his time at the investment firm.
So far, the market has responded extremely positively to SharpLink’s decision to move from marketing into the crypto space. Shares of SBET are up more than 500 percent in the last three months, reflecting both market enthusiasm for cryptocurrency projects and a positive view of SharpLink’s move away from its older, less-successful business model.
Is All that ETH a Problem for SBET?
SharpLink Gaming is sitting on a whole pile of ETH, and that seems like a plus at first glance but the other side of the sword is it’s a highly volatile asset with questionable long-term value. Nevertheless a lot of well-capitalized firms are snapping up a whole lot of ETH at these prices.
As a smaller cryptocurrency without Bitcoin’s comparatively large institutional backing, ETH amplifies these concerns and could prove to be an extremely risky asset on which to base the majority of a business’s value. ETH’s 52-week range runs from $1,393 to $4,782. Though ETH is still trading toward the higher end of that range at the moment, the amount of volatility it has gone through in the last year alone underscores just how much risk the cryptocurrency could place on a business like SharpLink.
Another risk SharpLink faces comes from its strategy of staking nearly all of the ETH it holds, allowing it to accumulate additional ETH from its staking activities. Though this can be beneficial, it can also have a downside if the price of ETH moves lower. In Q2, for example, SharpLink reported a non-cash impairment of $87.8 million from its staking activities due to lower prices in Q2. Management correctly pointed out that this was a purely non-cash loss that wasn’t realized by selling any of its cryptocurrency holdings. Even so, the practice of staking almost 100% of the ETH that SharpLink holds could prove to be aggressively risky.
Finally, SharpLink Gaming is exposed to the risks that emerge from the evolving regulations around cryptocurrency. Though US regulators are currently more friendly toward crypto than they historically have been, there’s little guarantee that that trend will continue indefinitely. Changes in regulation or future security issues with decentralized finance could negatively impact ETH and, by extension, SharpLink.
Is SBET Overvalued?
One area in which SharpLink Gaming may surprise investors is with its valuation. At the time of this writing, the business’s total market cap of $3.1 billion very closely mirrored the market value of the 740,760 ETH it held as of the most recent reporting. This is exactly what separates it from Strategy, which trades at a significant premium to its large Bitcoin reserves. In this sense, SBET’s valuation largely reflects the market value of its ETH holdings.
With that said, it’s important to consider how volatile the price of ETH can be and the ability of the business to perform credibly if its Ethereum treasury strategy doesn’t pan out. When it was operating as a marketing company, SharpLink’s annual revenues only ever reached a high of $16 million. This gives the business very little to fall back on if its bet on ETH fails. In Q2, SharpLink generated just $0.7 million in total revenues.
Moreover, SharpLink’s strategy of consistently building its ETH holdings means it could be pressured to keep raising capital. In Q2, for instance, the business raised a total of $2.6 billion to fuel its ETH purchases. This could become a problem over time if the price of ETH moves lower.
On the whole, SBET doesn’t appear to be overvalued in a traditional sense, given that its value closely reflects the overall value of its ETH holdings. Due to the volatility and risk involved in its ETH strategy, however, SharpLink’s valuation could prove to be prone to rapid changes driven much more by the movements of the crypto market than by traditional business fundamentals.
Is SharpLink Gaming Stock a Buy?
Although SBET may be more attractive than similar Bitcoin firms that trade at large premiums to their cryptocurrency holdings, the stock is likely still a very high-risk investment that is based more on ongoing interest in cryptocurrency than in its ability to generate cash flows through economically productive activity. In this sense, SBET appears to be quite speculative and could expose its shareholders to very high levels of volatility associated with fluctuations in the price of ETH.
On the whole, SBET doesn’t look like a particularly attractive stock to buy at the moment. For most traditional investors, the highly risky and speculative nature of an ETH treasury will likely look less than appealing. Even for those investors who are bullish on crypto, however, Ethereum ETFs may prove to be more sensible due to their direct exposure to ETH’s price movements. At the moment, SharpLink appears to be a company that has transformed itself with an innovative yet extremely risky strategy that hasn’t yet proven itself sufficiently to justify investment.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.