Coinbase Goes Public: ‘Madness That Makes Sense’

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Asit Sharma to discuss Coinbase (NASDAQ:COIN) as it goes public. He also analyzes Stitch Fix (NASDAQ:SFIX) founder Katrina Lake’s announcement that she’s stepping down as CEO. Plus, hear what the two have to say about the latest results from Bed Bath & Beyond (NASDAQ:BBBY).

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This video was recorded on April 14, 2021.

Chris Hill: It’s Wednesday, April 14th. Welcome to MarketFoolery. I’m Chris Hill. With me today, the one and only, Asit Sharma. Thanks for being here.

Asit Sharma: Chris, thank you for inviting me. Excited to talk about the topics you’ve got lined up for us today.

Hill: We’ve got retail earnings. We’ve got Coinbase going public, but we’re going to start with Stitch Fix because founder Katrina Lake is stepping down as CEO. Elizabeth Spaulding is going to move into the corner office later this year. The shares of Stitch Fix’s down more than 4%, and I understand it because I think for anyone who puts the phrase founder-led at the top of their list for reasons to buy a company like Stitch Fix, I would understand, I’m not saying, “Well, she’s no longer the CEO because she’s going to move over to be executive chairman. It’s not like she’s leaving the company,” but I understand if some die-hard Stitch Fix shareholders are a little flummoxed by this news.

Sharma: You know, Chris, there’s so many times when you can watch a CEO transition into the chairman space or executive chairman space as this is, and you’re OK with it because you do feel they’re very close to what’s happening strategically. It can chat with the CEO. Their handpicked CEO, in this case, successor who was formerly the president of the company, will be until August till this handover occurs. But Katrina Lake, such a unique founder, really integrated this idea of data science with fashion selection, and now it seems almost commonplace as I look back. You think about so many companies that are incorporating artificial intelligence into their customer-facing products. Today, it seems commonplace, but when she founded this company, it wasn’t. I know that Stitch Fix has had a bumpy ride even this last quarter that they reported. Chris, they saw their active engagement with their client base declining a bit, net revenue per client or active client that has declined about 7% year-over-year to $467, which is still a good number. But I think the argument has always been, “Well, Katrina Lake is at the head. As long as she is the CEO, I’m comfortable if it takes Stitch Fix some time to realize this business model where you’ve got artificial intelligence along with human fashion consultants to get products out to the fan base.” I don’t know how I feel about this one. I’m not a Stitch Fix owner, but I think, again, to your point, if you’ve been an investor and you’ve been patient, a big part of that is having this really engaged, intelligent and articulate, charismatic founder. Can I put one more adjective? Maybe I’m giving too much price, but I think she deserves it. She was all of that. What do you think, Chris, going forward? Obviously, the president here is very capable and has been handling a lot of operational activities. It’s not like they’re bringing someone from the outside who doesn’t know the business or is unproven. Still, I feel there’s something amiss here, and I question the timing.

Hill: I think you’re absolutely right in terms of the praise that you heaped upon Katrina Lake because, look, what she has done in creating this company, taking it public in 2017, growing it to the point that it’s at right now, nothing but props and respect to her for doing that. She’s 38 years old. Obviously, she has the money to do whatever she wants, but this is not Jim Sinegal, in his 70s, stepping down from the corner office at Costco. She’s 38 years old, and I just have a hard time, and I can’t imagine I’m the only one. I have a very hard time divorcing this move from her age because as you said, a lot of the bulk case for Stitch Fix was tied to not just her as a leader, but the patience that bowls would preach where it’s like, “Well, look, this is a young company, this is a young founder. Give him time. This is going to work out.” I think having Elizabeth Spaulding, as you said, she’s been there a couple of years. What I’ve read of her seems like she is someone worthy of respect, so this may be a great move. It doesn’t mean, however, that it isn’t puzzling.

Sharma: Yeah. Elizabeth Spaulding, she’s got a great operational background. I believe she came from Bain & Company, so she definitely has the chops to trim expenses. The question is going to be what type of strategic focus does she have. The good news here for investors is that Katrina Lake has left the company in good shape. There’s roughly a couple of $100 million in working capital on the balance sheet without any long-term debt. They are cash flow positive. Spaulding is well-resourced to take the company to this ultimate goal of being consistently profitable and maybe growing at a faster clip than we’ve seen in recent quarters. A big question mark remains over the company; why didn’t it grow more quickly during the pandemic? We saw so many online businesses, e-commerce businesses, fashion-oriented businesses takeoff when consumers were stuck at home with some money on their hands. I was surprised at the lack of outright revenue growth that Stitch Fix experienced over the last year and the fact that they couldn’t leverage this. 

I wonder if part of Katrina Lake stepping down is the fact that, “Look, the company is not in that bad of shape. Like I said, it’s got a solid balance sheet, but maybe there’s some fatigue here.” One would’ve thought this would’ve been a cannonball for a company like Stitch Fix, and I can’t repeat enough how many old-school companies like Target, for example, which is in the fashion world also, not quite this model, really saw tremendous sell-through of their fashion items. I can’t help but wonder if maybe she felt a little bit discouraged and just the need to step back a bit. But of course, when you leave the CEO role, it’s hard to get back in the driver’s seat.

Hill: Coinbase is going public today through a direct listing. It was founded nearly a decade ago as a way to simplify buying bitcoin. Coinbase has grown to the point where it’s the most popular crypto exchange in the U.S., and it is expected to open for trading somewhere in the neighborhood of $300 to $350 a share. You tell me, is this madness or is this like, “No, this makes sense”?

Sharma: This is madness that makes sense, Chris, if I can hedge a bit here.

Hill: I like that.

Sharma: Looking at some rough numbers, they are understated now. Some notes you and I were sharing, the market capitalization of Coinbase at some point today is going to be $65 billion, but I believe that’s based on a previous share price of like $250. Even that number is understated, it’s like it’s growing by the hour. Coinbase is interesting because it’s grabbed a lot of market share in a short amount of time. For those of you unfamiliar with what a cryptocurrency exchange is, just think of a place for buyers and sellers of cryptocurrency to meet. They can trade crypto assets like Bitcoin and other alternative assets. It’s akin to, say, the Nasdaq or the New York Stock Exchange. But instead of stocks, you are trading cryptocurrencies. What I think investors have been excited about looking at this picture is the amount of revenue and the amount of net income this company has been able to generate off of cryptocurrency. That’s just a few interesting numbers here. 

Last year, Coinbase generated $322 million in net income from $1.3 billion of revenue, and they just put out estimates for the first quarter, which has actually ended. But as the dust is settling on their results, they’ve labeled this as estimates. But basically, the company is saying that, in the first quarter alone, they’re going to swamp last year’s total numbers for the entire year. They’re looking at $1.8 billion in revenue and they’re going to book somewhere between $730 million and $830 million in net profit. Before I go into some of the downsides why you shouldn’t just rush into Coinbase, thoughts on those numbers, Chris?

Hill: I’m going to let you go into the downsides first.

Sharma: Okay. Well, hey, it all looks great. Here’s a company that is in this exciting space. It is throwing off massive revenue and income growth. The catch is that most of this, the lion’s share is generated off of Bitcoin trading. When people are trading Bitcoin like mad, this company tends to benefit. But we’ve seen in the past that Bitcoin interest is cyclical. Bitcoin has long periods where people decide that it is not this future asset that’s going to take over the monetary system, and the value will fall 40%, 50%, etc., and the company, Coinbase, experienced this in 2019. One of the cyclical troughs in Bitcoin interest occurred, and Coinbase had about $533 million in revenue only, and they lost $30 million on that. So the downside is simply this: for now, the platform depends on people trading Bitcoin and continued retail interest into this asset and continued institutional interest for the Elon Musk in the world who wants to put some Bitcoin on their balance sheet. As that fades, they can hit some rough quarters and with the type of valuation that I think we will see, that could spell near-term trouble if you’re focused on just what’s going to happen in the next year. Strap yourself in, it’s going to be a wild ride.

Hill: Let me ask you this, and I know this is going to come off as an oversimplification. But I’m wondering if you think this vehicle, Coinbase, if this becomes basically the default investment for a lot of fund managers, and I’m not for one second suggesting that individual retail investors like you and me should go out and buy shares of Coinbase just because it might be bought up and might be popular with mutual fund managers. But this strikes me as the sort of thing that, because it’s an exchange, you compared it to the Nasdaq, it seems like a relatively easy way for money managers to check the crypto box, to be able to go to clients and prospective clients who hear about crypto and it’s the new hotness, and what are you doing there? It’s a way for them to be like, “Oh, yeah. No, we have exposure. Yeah, we bought Coinbase early.” Again, it’s not a reason to go out and buy it, but I don’t think I’m completely wrong in thinking that what I just laid out is going to happen.

Sharma: I bet you’ll see a lot of that, Chris. Right now, if you are a mutual fund manager, it’s not simple to go out and buy Bitcoin for your fund. You have to open the account. You have to be able to track it and report it back into your fund. For many institutional managers, this could be an attractive solution. One knock that money fund managers have against buying a few traded instruments that are out there, the trusts that hold crypto assets is that they tend to trade at wildly fluctuating premiums or discounts to net asset value. So that’s difficult as well. But here you have it. You just buy the symbol and show your indirect exposure. That indirect exposure is a persuasive argument first for many shareholders. Look at the flip side of what I said. If you want exposure to Bitcoin, and you know that Coinbase goes up as Bitcoin rises because that generates more trading activity, then it is a pretty easy way to participate in Bitcoin’s rise without having to own the asset, whether you’re a retail or an institutional investor. 

The thing that may hurt this platform over the long term is, as more assets are traded and more cryptocurrency exchanges come into the public sphere, there may be pressure on these exchanges to reduce the fees, really fat fees that they are generating. Just as we saw in the brokerage industry, the real winners long-term in the stock brokerage industry are those that have branched out into other things versus just offering stocks that are bought and sold now for nothing, for no commission at all. This is a long-term drag that could hit Coinbase. But for the near-term, probably for the next several years, Chris, I think you’re going to see a lot of what you just laid out. I think you’ll see it appearing in more and more holdings in ETFs and among private managers as well.

Hill: Shares of Bed Bath & Beyond falling more than 10% this morning, fourth-quarter revenue was a bit lower than expected. Digital sales rose 86%, but that did not make up for the drop of in-store traffic. The drop in the stock price makes sense to me when you consider that this is a stock that’s up about 350% over the past year.

Sharma: For sure. I don’t think we should read too much into the fact that investors have high expectations. They’ve had them for a while. Bed Bath & Beyond has done an admirable job of slimming down. It got rid of a lot of non-central brands, leaving just four brands now that it has its core investments since. So that’s the Bed Bath & Beyond banner, Buy Buy Baby, which is actually spelled Buy Buy, B-U-Y B-U-Y, that makes sense, Decorist, and a revenue stream called Harmon Face Values. This company has been able to make shareholders happy by selling off those non-core brands, and it’s used those funds to repurchase shares and that’s also propped up the share price. But I just have an admiration for management because one of the hard things to do has been to trim down the number of stores under the Bed Bath & Beyond banner, and I think they’ve done that to a large extent. Of course, they’ve seen almost a doubling of various e-commerce sales within their banners. 

I think all in all, when you look at this company going forward, the biggest thing management has done has been to ensure its long-term survival. I don’t know how that plays out in stock price. Like you said, it’s at a valuation premium just now, but you have to hand it to this company for finding a way to survive when it looked like they were a just relic of the retail landscape. I should say here that one of my barometers for this is the Bed Bath & Beyond store that’s not too far from my house. I used to drive by it, thinking any day now this baby is going to shut down and I’m going to see that everything must go banner, but that never occurred and that traffic looks pretty stable.

Hill: Yeah. It’s one of the reasons I like Mark Tritton, the CEO, as part of the call, talked about their turnaround plan, which they are in the process of doing and gently reminded people like, “Look, this is going to be bumpy.” He didn’t say this, but I would just remind people that most turnaround plans are not a straight line. They can be bumpy, they can be messy. They involve, in the case of Bed Bath & Beyond, store closures, divestitures, as you indicated. I just look at the latest quarter and think, “All right. That could have been worse.” They still had same-store sales growth of 4%, which is not great by any stretch. But all things considered in the middle of a turnaround plan, I don’t think that’s all that bad.

Sharma: Yeah, not bad at all and I like that they reaffirmed their full-year outlook. So they are still aiming for sales of between $8 billion and $8.2 billion and they’re going to invest about $400 million in the business in CapEX to upgrade stores, build a few new stores. This has all the signs of a company that’s going to be around and has made it. At some point down the road, they’re going to get that balance that they need between the digital sales, which, thankfully to COVID, they finally got around to optimizing. There’s a strike in balance between the store footprint and digital sales, and I think they will be a precise investment. Again, it might take a few years before it makes sense to take the business in because as you’ve mentioned, Chris, a lot of it has been realized already. As Tritton has performed, the stock has responded in kind.

Hill: Asit Sharma, great talking to you. Thanks for being here.

Sharma: Thanks so much, Chris. A lot of fun.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. Show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.