Why We’re Liking Coinbase Stock At $128 a Share
Investing in some technology themes isn’t so straightforward. Take bitcoin for example. The simplest way is to just go buy some bitcoin and then not sleep well ever again. Or you can invest in a bitcoin ETF which we’ll be taking a look at in a future article, or several “bitcoin stocks” you should definitely pass on. Then there’s Square, which now counts the bitcoin they sell their customers as “revenues,” along with companies adding bitcoin – an extremely volatile asset class – to their balance sheets and trying to pass it off as a cash substitute. Aside from owning some bitcoin outright, there may be another way to make money off the cryptocurrency boom, no matter what direction it takes.
Acknowledging a True Leader
Before we even start discussing this company, can everyone just stop what they’re doing and let’s give the CEO of Coinbase, Brian Armstrong, a standing ovation for denouncing the divisiveness of American politics. On September 28, 2020, he published a blog post which said Coinbase will remain apolitical and mission focused, and no political discussions would be had in the workplace. Anyone who disagreed could leave and get a generous severance package, and around 5-6% of employees took him up on the offer. Good job Mr. Armstrong! You did the right thing here, and we can only hope that more companies follow your lead, refusing to engage in the political rhetoric that is weakening corporate America.
Unless firms take a stand like Mr. Armstrong has done, they’ll end up in a situation like Google is in. Mr. Pichai now spends a good chunk of his day trying to manage the fallout from an unruly team of incompetent activists instead of managing his company. Mr. Armstrong, we raise our glasses of lukewarm prosecco to the sky on this Sunday morning, and salute you for having the cojones to do what every company CEO should do – refuse to engage in politics.
About Coinbase Stock
We last came across Coinbase in our 2017 piece on the Top 7 Biggest Blockchain Startups That Are Not ICOs. (ICOs in their original form were companies that wanted you to invest in them without giving you any equity.) Since its founding in 2012, San Francisco startup Coinbase has taken in just over $547 million in funding to become much more than just a digital currency exchange. Today, Coinbase has an investment management arm, a full custodial service, an analytics offering, and at least 15 acquisitions worth of new functionality added to their platform. Their goal is to “create an open financial system for the world,” an ambiguous statement which can be better explained by looking under the hood of the venerable S-1 regulatory filing which – unlike glossy SPAC decks – is chock full of delicious information.
The Coinbase IPO
Right out of the gate we’re hit with some big numbers. The Coinbase platform has 43 million registered users, with 2.8 million transacting in a given month. Over its lifetime, Coinbase has processed $456 billion in trading volume with $90 billion in assets under management (AUM) being held on the platform in the form of custodial fiat currencies and cryptocurrencies.
Coinbase’s lifetime volume number of $465 billion seems less impressive when you consider that Nasdaq does twice that volume value in just three days of trading. The AUM number of $90 billion is impressive when you consider that most ETFs struggle to hit the $1 billion mark. (The ARK Invest success story is based on their ability to attract $60 billion in AUM in a very short period of time.) That is until you realize that a large part of Coinbase’s AUM increase is related to the recent upward movement of digital currencies.
Coinbase spent very little attracting those 43 million verified users. Since inception, over 90% of Coinbase retail users found them organically or through word-of-mouth.
Coinbase and Transaction Fees
We use Coinbase to store our meager investment in bitcoin which regularly fluctuates between “new entry-level Mercedes” and “used late-90s Ford F150,” despite the fact that we only invested “one Walmart Huffy mountain bike” in the stuff. One thing we don’t like at all about Coinbase is their excessive fees. Sure, crypto is complicated and all that, but do you really need to charge $150 for a $10,000 bitcoin transaction? Both when you buy, and when you sell?
Unfortunately, those complaints will fall on deaf ears, because transaction fees are the company’s bread and butter. For the year ended December 31, 2020, transaction revenue represented +96% of Coinbase’s revenues which totaled $1.28 billion in 2020, up +139% from the year prior.
Bitcoin and Ethereum trading pairs drove over 56% of total trading volume.
To Buy or Not to Buy
Coinbase is selling shares in a direct listing which means you need to contact your broker to buy shares. We’ve raised a query with Charles Schwab out of curiosity, though we’re very concerned about the current mania in the markets. What we know so far is very little. Coinbase only had a few transactions in 2020 where Union Square Ventures sold 2.08 million shares at $28.83 per share giving Coinbase an implied valuation of between $7-8 billion. That’s so 2020. In 2021 there’s a new rule that any exciting stock must sell in the triple digits while simultaneously offering triple-digit returns.
An article by Axios talks about how shares of Coinbase began trading on the Nasdaq Private Market (a secondary market) on Jan 29 at a price of $200 a share or an implied valuation of $54 billion. Then less than two weeks ago, a batch of 127,000 shares traded hands for $373 per share giving Coinbase an implied valuation of just over $100 billion. That’s not far off from the market cap of Goldman Sachs which sits at around $110 billion. To put that into perspective, Golden Slacks saw $9.5 billion in earnings in 2020 on revenues of about $41.5 billion. Are Coinbase shares suddenly worth +1,216% more than what a sophisticated institutional investor – Andreessen Horowitz – bought them for in September 2020? Probably not. One reason for Coinbase’s volatile share price is the underlying volatility of bitcoin, something that’s up +415% over the past twelve months.
One of the things we love most about S-1 filing documents is that they spell out risks. In addition to pointing out the obvious volatility risk, Coinbase also outlines some other risks such as if the creator of bitcoin is unveiled, or “development in mathematics, technology, including in digital computing, algebraic geometry, and quantum computing that could result in the cryptography being used by Bitcoin and Ethereum becoming insecure or ineffective.” First time we’re considering any of those risks, so good to know, but the biggest risk appears to be the extent to which Coinbase’s fortunes rely on bitcoin’s volatility. The S-1 document plays this down by highlighting how bitcoin volatility is declining over time:
Coinbase is also diversifying their revenues outside of bitcoin to other crypto stuff, though it’s likely all crypto is positively correlated as it all starts frothing away whenever bitcoin hits new highs. Here’s a look at how Coinbase is increasing the assets on their platform to reduce their reliance on the big two – BTC and ETH.
The most compelling reason to invest in Coinbase is that they’re a mission-focused company which happens to be one of the biggest players in the cryptocurrency space. (As of December 31, 2020, the total value of crypto assets on the Coinbase platform represented 11.1% of the total market capitalization of crypto assets.) With $1 billion in cash plus whatever they raise in this IPO, Coinbase should have enough dry powder to start acquiring the weak when bitcoin inevitably comes crashing to the ground. If, as ARK Invest believes, bitcoin hits the $140,000 mark by 2025, Coinbase will be in a good position to profit from that, and you’ll be able to sleep slightly better at night than if you owned bitcoin because you know Brian Armstrong is building some businesses to reduce the company’s reliance on transaction fees. It’s a BCG matrix just waiting to happen.
What’s a Fair Price for Coinbase Stock?
We don’t give investment advice, but that doesn’t stop retail investors from asking. Everyone always asks about price targets, as if some arbitrary value we pull out of our asses means something. But then we remember that we’re MBAs, and pulling random numbers out of our asses is what we do best. So, we start with the $28.33 that two institutional investors traded shares at six months ago and consider that our baseline. As mentioned before, that’s about an $8 billion valuation for Coinbase.
At the time those Coinbase shares swapped hands at $28.33 a share, bitcoin was trading at around $10,000 (currently trading at around $45,000). So, if we use the price of bitcoin as a proxy for the Coinbase share price, that means Coinbase shares should be trading at around $128 per share at an implied valuation of $36 billion. A simple price target put forward by simple people. (Pro Tip: For those who think that anything over $100 a share is “too expensive,” just wait until it hits $99 a share and you’ll be cooking with gas.)
Regardless of what our broker says, we’re likely to avoid Coinbase until shares have had some time to trade and the dust has settled. We’re investors, not speculators. Rather than pull a hero-or-zero on day one of trading, we’d rather slowly accumulate shares over time at decent prices. With a solid leader at the helm, Coinbase stands to benefit regardless of how bitcoin is trading, or what crypto asset crap is being peddled to the masses. We’re liking Coinbase stock, just not at inflated prices.
Once the offering is complete, shares of Coinbase will trade under the ticker COIN on Nasdaq.
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