We initiated coverage on shares of Coinbase Global with a Buy recommendation and a 12-month target price of $400. We start with the assumption that cryptoassets are here to stay. Not only has this invention solved a longstanding problem in computer science, but we think more solutions and services will continue to be built on top of this ecosystem.
Just like how the internet and then the mobile phone ushered in a wave of new services and companies, we think the invention of native digital assets that allow for the storage and transfer of value without the need for an intermediary will spur a wave of new applications.
However, the question for investors is: will Coinbase become the Amazon (AMZN) of the cryptoeconomy? In its current form, Coinbase is just an exchange and brokerage platform for users to convert fiat currencies (like the U.S. dollar) into cryptocurrencies and store, trade, or send them; nearly all of Coinbase’s revenue is derived from transaction fees.
This is not to detract from the value Coinbase has already created and will continue to create. E-Trade took advantage of the explosion in personal internet connections during the dot-com era, giving users an easy way to take control of their investing (remember the ETrade “so easy a baby can do it?” ads?).
Similarly, Coinbase was one of the first companies to provide an easy, safe, and intuitive way for retail customers to buy bitcoin and other cryptocurrencies, and will continue to do so, in our opinion. Our bear case scenario assumes Coinbase will continue to grow as an exchange but does not attribute any value to future products or services.
What if buying bitcoin is just the beginning? Just as Amazon.com realized the internet’s potential far exceeded only offering an online service to buy and sell books, Coinbase’s vision is to move beyond just offering a place to buy and sell bitcoin.
We are already seeing Coinbase start to move along this path by offering additional services and subscriptions, and its strong brand name and already established customer base could give it an advantage as crypto expands into other industries.
Any view on Coinbase necessarily includes a view on where the prices of cryptoassets are heading. Coinbase’s revenue is highly levered to the price of bitcoin and other cryptoassets. Therefore, any opinion on the value of Coinbase necessarily embeds a view on where you think the value of all cryptocurrencies are heading.
As of April 15, the market cap for bitcoin was nearing $1.2 trillion, while the total cryptocurrency market topped $2 trillion. To put this into perspective, the total market cap for all mined gold is $10-$12 trillion.
We think over the short to intermediate term (next 12 months), bitcoin could reach $100,000 or more per coin based on the past “halvening cycles” that bitcoin experiences every four years due to its pre-programmed monetary supply schedule that cuts its inflation rate in half.
We think this current cycle could be fueled by a rise in demand from corporations and institutional investors that are increasingly viewing bitcoin as an alternative asset or even alternative treasury reserve, store of value, and potential inflation hedge.
Investment Thesis and Valuation Given how new the crypto environment still is, we present what we see as two very different paths for Coinbase. While these two scenarios are very far apart in their valuation estimates, we think it is important for investors to increase their range of outcomes proportionate to the risk and uncertainty.
For each scenario, we use a two-stage discounted cash flow (DCF) model (with a 10-year explicit forecast) that uses the perpetuity method for the terminal value, a 3% long-term growth rate, and a 6.5% weighted average cost of capital (WACC), which is higher than financial exchange peers at approximately 5.0%-5.5% due to a higher assumed beta for Coinbase, given the volatility we expect.
Bear Case — $23 billion market cap or $120 per share.
To start, Coinbase is a pure-play company on bitcoin and other cryptoassets. The company does not offer other financial services like investing in traditional equities or payments, etc., and we do not see this changing.
Therefore, any value attributed to Coinbase needs to start with the belief that the cryptoeconomy has value and is here to stay. While we think this to be true, if it turns out crypto has absolutely no utility and is purely a vehicle of speculation, then Coinbase’s ultimate value is $0.
However, for our bear case, we assume cryptoassets do and will serve a purpose and provide value, and that Coinbase will continue to operate in its current form as an exchange. We assume revenue grows by a compound annual growth rate (CAGR) of 19% over the next decade.
While this is certainly above average, we note that this is equivalent to a conservative 200% growth rate in 2021 (Coinbase released preliminary Q1 2021 results showing a 944% year-over-year increase in total revenue) and then dropping down to 10% growth for the next five years and only 5% growth after that — the organic growth rate for financial exchanges.
This equates to Coinbase generating revenue of $6.8 billion by 2028, equal to Intercontinental Exchange’s current revenue (Intercontinental owns the New York Stock Exchange).
Operating margins are assumed to stabilize at 30%, much lower than exchange peers that operate at 50%-60% margins, and we assume significant capex or acquisition expenses to continue to fund growth. We think Coinbase will face stiff competition in the exchange space and trading fees will be compressed.
Bull Case — $166 billion market cap or $840 per share.
Just like Amazon.com realized the Internet and e-commerce revolution wasn’t limited to selling books or even only merchandise online, Coinbase believes the crypto revolution isn’t only about giving people an on-ramp to buy crypto.
Rather, the company is looking at being the number one name in the cryptoeconomy. Therefore, we assume Coinbase does what Amazon did in terms of revenue growth in the 10 years following the e-commerce revolution.
We assume Coinbase’s revenue grows at a CAGR of 36% for the next decade, slightly below Amazon’s 40% CAGR from 1998 to 2009. This equates to Coinbase’s revenue exceeding $19 billion by 2027, or slightly above current annual revenue at Charles Schwab.
However, unlike Amazon, we assume Coinbase can ramp operating margins to 50%, where other financial exchanges currently operate. To be clear, this is not to say we predict or even believe Coinbase will be the next Amazon of the crypto world!
This is only to bound our scenario analysis on what could be a very optimistic bull case and assess how high of expectations investors would be implicitly paying for Coinbase to achieve. (Although note this market cap is still well below Amazon as we assume a steady-state terminal value after this growth period, something Amazon has still arguably not yet hit.)
Risks: First, Coinbase’s business and operating results are highly leveraged to the nature, volatility, and price of cryptoassets. Thus, the company is dependent on the growth of the cryptoeconomy.
Second, any kind of cybersecurity event, hack, or breach could be detrimental to Coinbase’s business or brand. Third, Coinbase is subject to an extensive and highly evolving regulatory landscape.
Frank Curzio, Crypto Intelligence
I got complaints after I recommended Binance (BNB) a couple years ago. And some folks were annoyed when we bought ethereum (ETH) and bitcoin (BTC). But all of these recommendations turned out to be massive winners for us.
And after spending hours digging into Coinbase, I’m amazed the stock is trading below $300. The recent selloff in Coinbase creates an opportunity that’s too good to ignore. We can buy a dominant player in the crypto industry for an absolute steal right now.
As you probably know, Coinbase went public less than a month ago. As usual, there was a ton of hype… especially considering the booming crypto market. But in just a few short weeks, the hype has already faded. Investors are now focusing on the negatives.
Keep in mind, every company faces its share of negatives. There’s always something: increased competition, slowing growth, regulatory concerns, higher taxes, bad acquisitions… the list can go on and on.
It’s always important to go over the negatives when you’re considering an investment. That way, you know the downside scenario—the bear case. If the negatives are mostly temporary, it means there’s upside ahead as the company overcomes the hurdles.
One of the major criticisms for Coinbase is that there’s too much hype. A month ago, this was 100% true. When Coinbase went public on April 14, the hype was crazy. Investors pushed shares as high as $429 during the first day of trading (before finally closing at $310). Coinbase’s market cap almost hit $100 billion.
But in just three weeks, the stock is down nearly 35% from its highs. Its market cap is around $53 billion. And the latest headlines are more focused on the negatives I cover below. Put simply, the hype has faded.
Another popular criticism is that Coinbase relies too much on bitcoin. Bitcoin prices have run up a lot over the past year. If the price pulls back, Coinbase could see a big drop in business as its customers jump ship.
There’s some truth here… but it’s not a long-term problem. Bitcoin is already becoming a smaller portion of the overall crypto space. Based on market cap, bitcoin accounted for over 80% of the crypto market in recent years. Today, it’s at just 47%, down from around 70% at the start of the year. That’s a big deal—it means the crypto industry isn’t just a “bitcoin story”… and the same goes for Coinbase.
More importantly, Coinbase has positioned itself as a “hub” in the crypto industry. Its business includes tons of big institutions that want access to digital assets (not just bitcoin). It spent years working through the regulatory hurdles in order to operate in the U.S.
As a result, it’s the safest partner for every big institutional investor. And by going public, Coinbase raised enough capital that it can take advantage of opportunities as the crypto industry evolves.
The last negative I need to cover is the recent insider selling by Coinbase CEO Brian Armstrong. He sold 750,000 shares during last month’s public offering. That works out to nearly $300 million.
I don’t see any problem with this selling. Armstrong cofounded Coinbase back in 2012. He deserves to take some profits by trimming a portion of his stake. And the sale barely made a dent in his position. He sold less than 2% of his Coinbase holdings.
In short, the guy is still all in. He owns more than 38 million Coinbase shares. That’s nearly 20% of the entire company.
Looking at the bigger picture, the negatives for Coinbase are all minor… especially compared to the company’s massive growth profile as the dominant player in the crypto industry.
Coinbase announced preliminary results for its first quarter (Q1) ahead of its public offering last month. All of the numbers were mind-blowing. Revenue is on pace to grow more than 800% year-over-year (yoy). Net earnings are already near $800 million for Q1 (vs. just $32 million a year ago).
And assets on the Coinbase platform grew to $223 billion (up more than 1,200% from just $17 billion at the end of 2019). It’s also worth noting that over half ($122 billion) of these assets are from institutions.
In short, Coinbase is posting incredible growth. And it’s not likely to fade anytime soon. Coinbase’s total addressable market is estimated to be around $780 billion.
In other words, it’s carving out a slice of a massive, $780 billion market — which could drive growth for a decade or more. To put that number in perspective, it’s far bigger than the cloud computing market ($320 billion), cybersecurity ($250 billion), and even the cancer treatment market (around $170 billion).
And based on current full-year estimates, Coinbase is on track to rake in $5.1 billion in revenue in 2021. Compared to last year, that’s an incredible 302% growth rate.
Despite this amazing growth profile, shares of Coinbase are trading at around 44x forward earnings. That’s an absolute bargain valuation for a profitable company set to post 300% revenue growth. That’s why I had to cover all the negatives above—to see if they outweigh the growth potential.
After going through all the latest reports, I think the recent negativity on Coinbase is overblown. It’s mostly near-term concerns that ignore the massive, long-term growth profile of the crypto industry. In fact, I’m glad to see all the negative press. It gives us the opportunity to get in at a great price.
I spent a lot of time digging into the latest details before pulling the trigger on this pick. I also recognize the potential for central banks to eventually jump into the crypto space.
Yes, you read that correctly; I think we could see the Federal Reserve adopt its own digital currency within a few years. And I would make the case for the Fed partnering with Coinbase. It’s not as crazy as it sounds!
Coinbase is scheduled to report earnings on May 13. They already pre-announced the results last month. But we could still see some volatility around the news. So let’s start with a 2% position in Coinbase. This leaves us room to take advantage of volatility and build our stake over time. Buy up to $295.