Research Dynamics
Report on Swissquote by Research Dynamics: company update

This report is published by Research Dynamics, an independent research boutique

Another feather in the cap

Swissquote continues to augment its offerings.
On 22 October, Swissquote became the first bank worldwide to provide its clients the opportunity to participate in Initial Coin Offerings (ICOs). This enables Swissquote’s clients to diversify their asset base and be part of start-up or scale-up companies from the convenience of their traditional trading account. This is a significant addition to Swissquote’s platform. Previously, to participate in an ICO, investors needed to understand the blockchain technology and had to own a blockchain wallet. However, with Swissquote’s new offering, that is no longer a prerequisite: clients can directly purchase coins (tokens) of the issuing company using Swiss francs through their existing Swissquote trading account. Swissquote will manage execution and custody of tokens.

An Initial Coin Offering is an innovative way for companies to raise money via crowdfunding using blockchain. ICO is a close equivalent to IPO: companies undertaking an ICO issue blockchain-based ‘tokens’ instead of shares as in the case of an IPO. To summarise, the three fundamental differences between the two are that ICOs are i) decentralised (no single governing entity), ii) largely unregulated globally, but regulated in Switzerland under FINMA ICO guidelines and iii) structurally more flexible as compared to IPOs.

The first company whose tokens are available on Swissquote’s platform is a Swiss start-up company named LakeDiamond (spin-off of the Swiss Federal Institute of Technology, EPFL Lausanne). LakeDiamond (www.lakediamond.ch), combining competencies and expertise with a team of strategy and business developers, quantum physicists and computer scientists, blockchain and crypto professionals, and experts in diamond growth, photonics and electronics, strives to power the diamond revolution by developing the infrastructure to grow, transform and sell machine-made diamonds. Diamonds are used in many industrial applications such as, among others, micromechanics, photonics, electronics or biotech. The company has been focused on creating laboratory-grown diamonds of highest-grade quality. Now, on the advent of moving manufacturing into industrial scale production, LakeDiamond is looking to finance its further development by a public ICO.

LakeDiamond thus aims to sell machine production minutes in the form of tokens using the ICO route. Accordingly, LakeDiamond has issued virtual tokens worth CHF 60.5mn which correspond to the actual machine time. The tokens follow the technical standards used for the Ethereum platform. The minimum purchase consists of 60 LakeDiamond tokens (LKD), which is equivalent to CHF 33. Swissquote clients in addition have an exclusive advantage offered on its platform: clients will receive one additional free token for every ten tokens purchased until CHF 4mn are raised through the issue.

As mentioned in our earlier reports, technology and innovation remain the primary differentiating factors for Swissquote. Currently, Swissquote’s platform allows its clients to trade in ~80,000 ETFs, ~50,000 tradable bonds, ~20,000 mutual funds, securities, options, futures, commodities, currencies and indices from their online banking account. Moreover, the company’s ~100 B2B partners could use Swissquote’s platform to offer over three million products. We believe the inclusion of ICO on its platform underlines Swissquote’s focus on innovatively expanding its product portfolio. This offer positions Swissquote once more as online technology leader to its client base as well as its investors.

Valuation
While we are optimistic about this development, we have kept our estimates unchanged at the moment, until we can fully assess the financial impact of this initiative. Our blended fair value of CHF 82.80 per share remains unchanged as well, impying an upside of 89.2% from current levels. The stock has corrected ~42.3% from its 52-week high, which in our view provides an attractive entry point for mid to long-term investors, given Swissquote’s strong fundamentals along with a well-diversified product and service portfolio. The negative development of the share price over the last few days seems unwarranted and overdone in our view. Although bank shares in general have been under pressure for a while due to the flattening of the yield curve, Swissquote is not affected because it benefits from the rise in short term US interest rates. In addition, the negative impact of the implementation of the new European Securities Markets Authority (ESMA) regulations on some EU based competitors active in leverage forex does not affect Swissquote, as it has a minimal exposure in the EU. With no negative news announced by the company, and with a current increased market volatility which is supportive to Swissquote’s business model (higher trading income), we continue to be optimistic about the share price development mid to long term.