A FinTech IPO Shows That We Are in A Blockchain Bubble

A couple of weeks ago a small cap stock showed up on my India stock screener. My preliminary research yielded that this company had a subsidiary that was going to list on Nasdaq. I went through the investor presentation for the IPO and it was nothing spectacular, but I wanted to delve deeper. Therefore, I made a small investment in the company aka Stampede Capital.

LongFin (Ticker Code: LFIN) was to be listed on Nasdaq at the end of 2017 at the time I bought the shares. The potential value of Stampede’s holding in LFIN was ~Rs. 800 crores. With Stampede Capital trading under Rs. 200 crore market cap I assumed that the stock would have a small pop on the subsidiary’s listing.

LFIN listed on Nasdaq on December 13, 2017 at $5.38 with a market cap of $370 million. Stampede Capital even made a disclosure to the Indian stock markets that it owned 37.14% of LFIN i.e. its holding is worth $137.42 million (Rs. 886 crores). The stock price held firm at the IPO price until the 15th of December. Stampede hit an upper circuit in the Indian stock exchanges too. Everything was going as per the investment thesis I had outlined, but what came after that was beyond my wildest imagination…

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On Friday (i.e. December 15th), LFIN announced that it was acquiring a company, Meridian Tech Pte from Singapore. Meridian owns, Ziddu.com. Ziddu’s website describes that “We are a Blockchain research company developing decentralized application for micro lending and warehouse financing.” Ziddu & Meridian were in the news in 2015 when Amitabh Bachchan & Family acquired a minority stake in Meridian at a $71 million valuation. The same ET article also mentioned that Amitabh Bachchan owns 3.40% of Stampede Capital.

CNBC states that Ziddu was acquired by LFIN in exchange for 2.5 million shares. At a $5.38 price per share it values the deal at $13.45 million i.e. at a 72% discount to the valuation the Bachchans were offered. However the news that LFIN acquired a relatively unknown blockchain company led to an explosion in the LFIN stock! The stock surged to $142 on Monday valuing LFIN at $7 billion!  The stock corrected later closing at $72 per share. At that price the Meridian acquisition is now is worth $180 million i.e. 2.5x to the Bachchans. However, the biggest winner will be Stampede Capital shareholders.  Stampede’s shareholding is now worth a whopping $2 billion or 64 times its current market cap! Look at the chart below that captures LFIN’s stock movement from start of trading Friday to end of trading Monday.

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The exuberance in LFIN’s stock price led to CEO, Venkat Meenavalli to point out to CNBC  that Ziddu was going to “make” $3 million next year. In a nutshell even, he agreed that this rally isn’t in line with the fundamentals. Another CNBC reporter mentioned that the CFO & COO of the company had resigned on December 11, 2017. At the end of the day a Boston based securities litigation firm said it was investigating the volatility in the LFIN stock.

This sequence of events has added several legs of confidence to my fear that we are at the peak of a blockchain bubble. LFIN is one of several examples wherein the mere mention of blockchain, even in the name of the company has led to a massive surge in the company’s valuation. Left unchecked, it won’t end well for those that are entering the crypto-mania rollercoaster.