Coinbase, the largest U.S. cryptocurrency exchange, is expected to go public on April 14, via a direct listing on the Nasdaq exchange with the ticker COIN. The company’s public debut comes at a time when the market for crypto assets is booming, amid increasing interest from not just retail investors but also institutions. Although the proposed listing price isn’t known yet, private market valuations for Coinbase stood at about $68 billion as of Q1 and investors expect that valuations could top $100 billion, given that the company just published a stellar set of preliminary Q1 2021 results with revenue jumping 9x year-over-year. That said, the crypto market might be getting a bit too hot with bellwether Bitcoin up by over 8x over the last 12 months, and bond yields rising, meaning that Coinbase might be listing as the market peaks. So how do we value Coinbase? Our interactive dashboard analysis Coinbase Valuation: Expensive Or Cheap? provides an overview of the company’s key financials, potential valuation, and peer data. Users can arrive at their own valuation for Coinbase stock using our model. Parts of the analysis are summarized below.
Revenues Have Soared Mirroring Bitcoin’s Price Rise
Coinbase’s platform primarily enables retail and institutional customers to buy, sell, and store cryptocurrencies such as Bitcoin and Ethereum. About 90% of the company’s revenues come from the transaction fees from trading and via services such as storage and analytics. The remaining 10% of the company’s sales last year came from the revenue it books by selling its own crypto assets to customers. Now, transaction revenues are heavily dependent on the pricing trend for cryptocurrencies (particularly Bitcoin). This, in turn, influences the number of monthly transacting users (MTU) on its platform and the total value of transactions. Higher price volatility for crypto assets also drives up revenues.
Total revenue rose from around $534 million in 2019 to $1.28 billion in 2020, as the company’s monthly transacting users rose from about 1 million to about 2.8 million, with total trading volumes rising from around $80 billion to $193 billion. The company had a blowout Q1 2021, noting that revenues likely grew to $1.8 billion, with trading volume for the quarter alone rising to $335 billion as prices for Bitcoin almost doubled year-to-date, driving up MTUs on the platform. (Related Coinbase Revenues: How Does COIN Make Money?) At the current Q1 run rate, the company’s revenues would top $7.2 billion for the full year, but that’s probably being too optimistic as the Bitcoin rally might not hold up. We think it’s more likely that revenue will stand at a little over $5 billion this year.
Margins Are Solid, But Will Coinbase Be Consistently Profitable?
Unlike many unicorns that go public, Coinbase appears to be more mature and is currently profitable, although the company acknowledges that it could take a while before it sees consistent profitability. Net margins turned positive in 2020, coming in at about 25% and the number is likely to pick up further in 2021. Based on preliminary Q1 2021 results, margins for the quarter were estimated to be as high as 44% driven by strong trading volumes on the platform amid surgingbitcoin prices These thick margins are supported by relatively high transaction fees, which are estimated at about 0.5% of trade value with lower fees for larger trades. That’s well ahead of other exchanges such as the Nasdaq. However, earnings could decline sharply if the crypto-asset prices decline.
Will Coinbase Be Valued Like A Cyclical Stock?
Coinbase is likely to list at a sizable premium to its private market valuation, given the higher valuations for equities in general, its stellar Q1 numbers, and strong investor appetite for crypto assets. Moreover, the company, which held roughly 11% of all cryptocurrency by value as of last quarter, is presently one of the few pure-play options for investors to bet on the broader crypto economy. That said, there are concerns. The crypto market is inherently cyclical and prices typically correct sharply after a big rally. Coinbase estimates that this happens once every two to four years, noting that there have been four major crypto-asset price cycles since 2010. This likely means that Coinbase’s earnings will be cyclical and so will its stock price. Separately, the company’s move to go with a direct listing means that early investors can sell shares on the first day of trading without the typical IPO lockup period, potentially contributing to a strong supply of the stock.
Our model values Coinbase at about 15x our estimated $5.4 billion in 2021 revenue for the company, translating into a market cap of a little over $80 billion. This compares to a forward multiple of about 8.5x and 12x respectively for payments majors Square (NYSE:SQ) and PayPay (NASDAQ:PYPL), which have growing exposure to cryptocurrencies, and a 9x multiple for The Intercontinental Exchange (NYSE:ICE). Although these companies are likely to see much lower revenue growth rates compared to Coinbase this year, their revenues and profits are likely to be more stable. See our analysis Coinbase Valuation: Expensive Or Cheap? for more details on how Coinbase’s revenues, margins, and growth rates compare with peers.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.