Coinbase: Highly Overvalued At $100 Billion Valuation
Summary
- Our valuation analysis suggests a range of $31.9 billion to $47.9 billion in market cap for Coinbase.
- Our base case valuation of Coinbase is $39.9 billion, which is nearly 60% lower than the purported private market value of $100 billion that Coinbase received recently.
- Overall, at an implied market cap value of $100 billion for Coinbase, we think that there is much larger potential downside risk than upside appreciation.
- Coinbase is highly exposed to other competitors coming out with more cut-throat lower fees for trading cryptos in the future.
Comparable Companies Valuation Analysis
Our valuation analysis suggests a range of $31.9 billion to $47.9 billion in market cap for Coinbase (NASDAQ:COIN). Our base case valuation of Coinbase is $39.9 billion, which is nearly 5x the value the company received in October 2018 ($8 billion) in private funding transaction. However, our base case value of $39.9 billion is nearly 60% lower than the purported recent private market value of $100 billion that Coinbase received recently.
Because of the lack of the directly comparable cryptocurrency focused exchanges, we compare Coinbase against some of the biggest exchanges (mostly stock markets) globally including Intercontinental Exchange (ICE), Nasdaq Exchange (NDAQ), and Euronext (OTCPK:EUXTF).
Our base case valuation is based on 31.2x the company's sales of $1.3 billion in 2020. This P/S multiple is based on 5x the average P/S multiple of its peers including Intercontinental Exchange, Nasdaq Exchange, and Euronext. The peers are trading at an average P/S multiple of 6.2x in 2020. Our reasoning of applying a 5x higher P/S multiple on Coinbase versus its peers is because Coinbase's sales growth in 2020 was 5x higher (139.4% YoY) than the average sales growth rate of its peers (27.9% YoY).
Nonetheless, applying a 31.2x P/S multiple on Coinbase's 2020 sales may even be generous as Coinbase's business model which mainly involves Bitcoin and Ethereum which are exposed to higher volatility, uncertainties, and regulatory risks as compared to ICE, Nasdaq, and Euronext.
In addition, the combined market caps of ICE, Nasdaq Exchange, and Euronext are $94 billion which is less than the recent private market valuation of nearly $100 billion for Coinbase. We find it hard to digest how Coinbase could be valued higher than the combined market caps of these three largest exchanges in the world, especially because Coinbase is highly exposed to other competitors coming out with more cut-throat lower fees for trading cryptos in the future.
Overall, at an implied market cap value of $100 billion for Coinbase, we think that there is much larger potential downside risk than upside appreciation. As such, we think that the prudent investor should avoid this direct listing of Coinbase if indeed it is priced at nearly $100 billion. Despite the numerous positive factors (such as surging sales growth and turn to profitability), it is difficult to argue for a valuation of nearly $100 billion for Coinbase, which would represent a whopping 78x P/S multiple (using 2020 sales).
Even the company has pointed out in its prospectus that Bitcoin has experienced four major cycles since its launch (the fourth cycle is still ongoing). We would argue that for the prudent investors, there is no rush to buy Coinbase while Bitcoin price is near at its all time highs. The prudent investor should wait until there is a major correction in the Bitcoin price to see how the Coinbase's financials are able to withstand such correction.
In addition, we would argue that as the Bitcoin and crypto trading become more mainstream, the trading fees for the cryptos will go down much more significantly, which is likely to negatively impact Coinbase.
| Coinbase Comparable Companies Valuation Analysis | ||||||
| Companies | Mkt Cap (US$ bil) | Sales (US$bil); 2019 | Sales (US$bil); 2020 | P/S (2019) | P/S (2020) | Sales (2020); % Change YoY |
| Intercontinental Exchange | 63.8 | 6.6 | 8.2 | 9.7 | 7.7 | 25.9% |
| Nasdaq Exchange | 24.8 | 4.3 | 5.6 | 5.8 | 4.4 | 32.2% |
| Euronext | 5.0 | 0.6 | 0.8 | 8.3 | 6.6 | 25.7% |
| Average | 8.0 | 6.2 | 27.9% | |||
| Source: Author, from Company data, Yahoo Finance, Marketscreener | ||||||
| Coinbase Comparable Companies Valuation Analysis | |||||
| Companies | OP (US$ bil); (2019) | OP (US$ bil); (2020) | OP Margin (2019) | OP Margin (2020) | OP % Change YoY (2020) |
| Intercontinental Exchange | 2.7 | 3.1 | 40.8% | 38.1% | 17.6% |
| Nasdaq Exchange | 1.1 | 1.3 | 25.5% | 23.4% | 21.1% |
| Euronext | 0.3 | 0.4 | 52.4% | 52.5% | 25.9% |
| Average | 39.6% | 38.0% | 21.5% | ||
| Source: Author, from Company data, Yahoo Finance, Marketscreener | |||||
Coinbase Comparable Companies Valuation Sensitivity Analysis (Implied Market Cap) | ||||
| (US$billion) | P/S; 2020 | |||
| Low | Base | High | ||
| 25.0 | 31.2 | 37.5 | ||
| Sales ($billion); 2020 | 1.3 | 31.9 | 39.9 | 47.9 |
| Source: Our Estimates | ||||
Coinbase Income Statement Analysis
Coinbase generated sales of $1.3 billion in 2020 (up 139.4% YoY). It also had an operating profit of $409 million in 2020, from an operating loss of $45.8 million in 2019. Coinbase generates nearly all of its revenues from commissions and fees. Transaction revenue represented over 96% of its net revenue in 2020. The company's revenues are highly impacted by the changing crypto prices. Therefore, we would argue that the company's sales and profit growth in 2020 is highly impacted by the surging crypto prices and in the evident of a major downturn in crypto prices, the company's results are bound to deteriorate significantly.
Since late 2018, the company has launched a range of subscription products and services such as Store, Stake, and Borrow & Lend in order to diversify its revenue stream and reduce its reliance on transaction fees. However, they currently remain a minor portion of the company's revenues.
The improvement in the operating margins was due to the surging sales growth and a decline in total operating expenses as a percentage of sales which declined from 108.6% in 2019 to 68% in 2020. Among the major operating expenses, the biggest improvements have come from the transaction expense, technology & development, and general & admin expenses. The transaction expense as a percentage of sales declined from 15.4% in 2019 to 10.6% in 2020. The general & admin expenses as a percentage of sales also declined significantly from 43.5% in 2019 to 21.9% in 2020.
Although the company has done a good job in increasing sales and profits in 2020, they were driven at a period when crypto prices rallied strongly. The company faces a major risk of significant decline in sales and profit growth if the crypto prices decline materially.
| Coinbase Income Statement | |||
| (US$ million) | 2019 | 2020 | % Change YoY |
| Total Revenue | 533.7 | 1,277.5 | 139.4% |
| Net Revenue | 482.9 | 1,141.2 | 136.3% |
| Other Revenue | 50.8 | 136.3 | 168.5% |
| Total Operating Expenses | 579.5 | 868.5 | 49.9% |
| Transaction expense | 82.1 | 135.5 | 65.1% |
| Technology & development | 185.0 | 271.7 | 46.8% |
| Sales & marketing | 24.2 | 56.8 | 135.1% |
| General & admin | 231.9 | 279.9 | 20.7% |
| Restructuring | 10.1 | 0.0 | -100.0% |
| Other operating expenses | 46.2 | 124.6 | 169.6% |
| Operating Income/(Loss) | -45.8 | 409.0 | TB |
| Non-operating Items | -0.4 | -0.2 | |
| Earnings Before Tax | -45.4 | 409.2 | |
| Taxes | -15.0 | 86.9 | |
| Net Income/(Loss) | -30.4 | 322.3 | |
| % of Total Revenue | 2019 | 2020 | |
| Total Revenue | 100.0% | 100.0% | |
| Net Revenue | 90.5% | 89.3% | |
| Other Revenue | 9.5% | 10.7% | |
| Total Operating Expenses | 108.6% | 68.0% | |
| Transaction expense | 15.4% | 10.6% | |
| Technology & development | 34.7% | 21.3% | |
| Sales & marketing | 4.5% | 4.4% | |
| General & admin | 43.5% | 21.9% | |
| Restructuring | 1.9% | 0.0% | |
| Other operating expenses | 8.7% | 9.8% | |
| Operating Income/(Loss) | -8.6% | 32.0% | |
| Source: Author, from Company data | |||
Source: Author, from Company data
Source: Author, from Company data
Source: Author, from Company data
Coinbase (Key Business Metrics and Financial Measures)
The key business metrics for the company include items including verified users, monthly transacting users, assets on platform, and trading volume. These figures show sharply increasing growth rates and are provided for the last two years. We would argue that the company is subject to big declines in these key business metrics' growth rates if there are sharp declines in crypto prices in the next several years.
Verified users - The company had 43 million verified users at the end of 2020, up 34.4% YoY.
Monthly transacting users (MTU) - The company defines MTU as a retail user who transacts in one or more products on its platform at least once during the rolling 28-day period ending on the date of measurement. MTUs increased from 1 million in 2019 to 2.8 million in 2020, up 180% YoY.
Assets on platform - Assets on platform are highly impacted by the changing crypto prices. From December 31, 2017 to December 31, 2018, Bitcoin and Ethereum prices declined 74% and 82%, respectively. During the same period, the company's assets on platform decreased by 73%.
The total market capitalization of crypto assets surged from less than $500 million at the end of 2012 to $782 billion at the end of 2020, representing a CAGR of over 150% during this period. At the end of 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of the company's assets on platform, respectively. Assets on platform surged from $16.9 billion at the end of 2019 to $90.3 billion at the end of 2020, up 432% YoY.
Trading volume - Trading volume on the Coinbase exchange increased from $79.9 billion in 2019 to $193.1 billion in 2020, up 141.7% YoY.
| Coinbase (Key Business Metrics & Financial Measures) | |||
| (in millions) | 2019 | 2020 | % Change YoY |
| Verified Users | 32 | 43 | 34.4% |
| Monthly Transacting Users (MTU) | 1.0 | 2.8 | 180.0% |
| Assets on Platform | 16,969 | 90,307 | 432.2% |
| Trading Volume | 79,906 | 193,097 | 141.7% |
| Net Income (Loss) | -30 | 322 | TB |
| Adjusted EBITDA | 24 | 527 | 2095.8% |
| Source: Author, from Company data | |||
Bitcoin Price Trend - There have been four major crypto asset price cycles since 2010, with each cycle lasting about two to four years. In the three price cycles prior to the current one, crypto prices have subsequently declined from each peak and settled at a trough higher than the prior peak.
Crypto Market Capitalization vs. S&P 500 - Prior to the start of the COVID-19 pandemic in 1Q 2019, there was not a really visible correlation between the S&P 500 and the crypto market capitalization. However, in the past year, there certainly has been a positive correlation between them. This presents a key risk factor for Coinbase since if there is a major downturn in the S&P 500, it could also drag along the crypto markets as well.
Coinbase's market share in the crypto market capitalization increased from 4.5% in 2018 to 8.3% in 2019, and 11.1% in 2020. The company has done a really good job of taking away market share from its competitors.
Competition
The company faces competition from a wide range of competitors including both big and small companies. For retail users, it competes with firms such as Square (SQ) and Robinhood (RBNHD). PayPal (PYPL) also recently introduced crypto products and services. Binance, which is mostly focused on the crypto market, is also a major competitor. Other major competitors include Gemini, Bitstamp, and Kraken.
The top five crypto exchanges include Binance, Coinbase Pro, Huobi Global, Kraken, and Bitfinex. Among the top 10 cryptocurrency exchanges, globally, two of them are based in Korea including Bithumb and Coinone.
Comparisons of Coinbase, Kraken, and Binance
The comparisons of Coinbase, Kraken, and Binance suggest that while Coinbase is able to enjoy some higher pricing advantages than these other two leading players, this may be because many customers still are willing to pay higher prices for the quality of service and lack of security breaches. In our view, the competitors are likely to catch up to Coinbase in terms of these two factors as well as provide lower pricing for trading cryptos in the coming years which is likely to result in a more difficult competitive environment for Coinbase.
Coinbase and Kraken are two of the leading crypto exchanges based in the United States. Unlike Coinbase, Kraken charges flat fees on crypto purchases. The standard deposit fee for Kraken is $5. By offering flat fees, Kraken is trying to grab more institutional customers. Coinbase's service has a percentage based fee (of purchasing cryptos) that starts at 1.49% for bank transfers and the fees increase to 3.99% if debit or credit cards are used. Looking at the fees structures, it would appear that many institutional investors could be interested in the flat fees offered by Kraken but many retail investors that invest only small sums of money in cryptos may be more interested in Coinbase.
One of the major differences between Coinbase and Kraken is the digital wallets. Coinbase has completely separate services for the wallets and its crypto exchange (unlike Kraken), which provides a clear separation between the funds the customers would like to hold and the ones they would like to trade. However, at times, the transferring of funds between the exchange and the wallets remains a bit inconvenient. Overall, it appears that Coinbase has an easier user experience, especially among the new users in the crypto market. However, Kraken may be more convenient for more experienced institutional investors.
The trading fees for Kraken start at 0.16% for maker orders and 0.26% for taker orders. These fees are reduced as the customers' 30 days trading volume increases. At the lowest levels, Kraken customers can place free maker trades and 0.10% taker trades if they have a 30-day volume greater than$10 million.
The trading fees for Coinbase start at 0.5% for both taker and maker, which is much more expensive as compared to other leading exchanges. The trading fees for Coinbase decline as the customers increase their 30 day trading volume. Trading under $10,000 over a 30 day period means the customer will incur 0.5% trading fees. Once the customer reaches $1 billion or more, these fees are reduced to 0.04% for taker and 0.00% for maker. Overall, for most investors, Kraken would provide lower trading fees as compared to Coinbase.
Binance also has a tiered trading fee structure and it has one of the most competitive trading fees structures in the market. For Binance, at the lowest volume levels, fees are 0.1% for both makers and takers and at the highest trade volume levels, the fees come down to 0.02% and 0.04% for makers and takers, respectively. In addition, the users can further reduce their trading fees by as much as 25% if they pay fees in Binance's native BNB token.
Why use Coinbase if it has higher fees than Binance and Kraken? Despite Coinbase having higher fees than Binance and Kraken, it appears that millions of people have flocked to using Coinbase mainly due to its better performance on 1) ease of use, 2) security, and 3) customer service. Many customers are willing to pay a bit extra on the trading fees that Coinbase charges due to is relative better performance on its strengths, especially the fact that Coinbase is often cited as the most user friendly.
Also, there have been several cases of hackers stealing cryptos from other smaller exchanges as well as from competitors such as Kraken in the past several years. Coinbase has successfully thwarted off attempts by the hackers to steal money from its accounts. Many customers of Coinbase believe that it is one of the safest cryptocurrency exchanges in the market.
| Cryptos Purchase & Withdrawal Fees Comparisons of Leading Crypto Exchanges | |||
| Coinbase | Binance | Kraken | |
| Cryptos Purchase Fees | Up to 3.99% | 0.10% | Up to 0.26% |
| Withdrawal Fees | Up to 3% | 3.5% (min $10) | Up to $60 |
| Fiat Currency Trading | USD | USD/EUR + 50 more | USD |
| Source: Author, from Companies data, Kraken vs Binance: Features, Fees & More (2021) | |||
Conclusion
We believe that the prudent investor would avoid the Coinbase direct listing if indeed the pricing is completed at a market cap of nearly $100 billion. Our base case valuation is $39.9 billion, which is nearly 60% discount to the recent private market valuation of about $100 billion.
At a valuation of nearly $100 billion, this would be more than the market caps of the three of the world's largest stock market/commodity exchanges including the Intercontinental Exchange, Nasdaq Exchange, and the Euronext which combined have $94 billion in market cap. We find it hard to understand how Coinbase could be valued higher than the combined market caps of these three largest exchanges in the world, especially because Coinbase is highly exposed to other competitors coming out with more cut-throat lower fees for trading cryptos in the future.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (36)
Coinbase (COIN US) reported excellent 1Q 2021 earnings today ahead of its IPO listing on April 14th. For the three months ended March 31, 2021, the company expects the following: Total Revenue of approximately $1.8 billion - This is a tremendous performance as it has generated more revenue in 1Q 2021 than its entire 2020 when it had sales of $1.3 billion. Net Income of approximately $730 million to $800 million - The company's net income in 1Q 2021 was more than the entire net income of$322 million in 2020. In the direct listing on 14 April, Coinbase is aiming for about $100 billion in valuation. In 1Q 2021, it had sales of $1.8 billion and high end net profit of $800 million. If we annualize these figures, this would result in annual sales of $7.2 billion and annual net profit of $3.2 billion. These are phenomenal figures. At $100 billion valuation, this would suggest a P/E of 31x. Many investors would be comfortable with these kind of multiples as being reasonable. Nonetheless, the key problem we see with the company's outlook is how the company will be able to thwart off its challengers in the midst of a much more price competitive environment. Although the company provided guidance about MTUs, they did not really provide specific guidance on pricing going forward. There will likely be many existing and new competitors that will rise up offering much more competitive prices than those offered by Coinbase and unless Coinbase counteracts with competitive pricing in the future, it is likely to lose its customers to its competitors. All in all, we stick with our original thesis and valuation on Coinbase over a one year view. Our valuation analysis suggests a range of $31.9 billion to $47.9 billion in market cap for Coinbase. Our base case valuation of Coinbase is $39.9 billion, which is nearly 60% lower than the $100 billion value that Coinbase is trying to aim in this direct listing. In terms of short-term trading post IPO, given the excellent 1Q 2021 results, we believe that the company's valuation could indeed reach $100 billion. However, we believe this kind of valuation to be short lasting. Over a longer view (one year), we believe there is a higher probability that the company's valuation declines to our base case level (about $40 billion). This will become more evident as numerous other competitors offer extremely low pricing and many customers switch to their services.
But i dont think it’s gonna happen 😭
"The company faces a major risk of significant decline in sales and profit growth if the crypto prices decline materially" - given how elevated cryptos are right now, don't you think a lot of people are waiting for prices to drop, before buying? My point is, with any downside on prices, especially a material one, more people will start buying and selling cryptos (sell to lock in gains, or buy for those who missed the boat) and thus commission for Coinbase will grow even more?
The crypto exchange is also said to be under multiple investigations for potential earlier misconduct.
That said totally agree with the author.
I hear Kraken has plans for an IPO end of this year or next year, CEO publically says he'd like too but no dates set. That's a crypto exchange IPO I may be interested in, though time will tell.
Edit: TFL's Anchor protocol allows user to deposit UST, stable coin pegged to the US dollar, and earn around 20% APY. Yeah, 20% APY, on a US dollar pegged stable coin (veerrry low volatility investment/savings, outperforms most if not all bank accounts). CB backed Anchor, so if deposits in Anchor (and compounds their returns back into Anchor... returns are constantly accrued not paid out yearly, monthly, weekly, or even daily).... might be a pretty penny indeed.
