Launching Coverage of Coinbase with $194 FVE, No Moat

We are initiating coverage on Coinbase (COIN) with a $194 per share fair value estimate, no-moat rating, and a very high uncertainty rating. We consider the stock 31% overvalued based on the $255.50 closing price on August 5. Our fair value estimate is 29 times our 2021 earnings projection. This may seem fairly low given Coinbase’s growth potential, but investors should note that the company has benefited from high volatility in cryptocurrency markets during the first half of 2021, which drove trading revenue to all-time highs in the first quarter, but since then conditions have moderated.

Coinbase is the largest cryptocurrency exchange in the US, giving it a strong position in an admittedly uncertain industry. Unlike traditional US exchanges, Coinbase’s users interact with it directly though either its website, mobile app, or Coinbase Pro platform. Usership has grown as interest in cryptocurrency has increased and the company ended Mach 2021 with over 6 million monthly retail traders on its platform. While the exchange sees a substantial amount of institutional activity, a result of its strong compliance and cyber security record, retail traders are still its primary source of revenue.

Coinbase receives more than 95% of its revenue from transactional sources, specifically trading fees charged as a percentage of the value of a trade. In addition to Coinbase’s transactional nature and its reliance on retail traders, the company is deeply cyclical with results correlated heavily to the performance of cryptocurrency as an asset class. Recently this cyclicality has worked in Coinbase’s favor, the first quarter of 2021 was a great one for the exchange, with higher earnings during the quarter than the entirety of 2020. However, we expect the second half of 2021 to be slower than the first. We also project lower revenue and earnings in 2022 than in 2021, though still well above 2020 levels, as less speculative energy leads to lower trading volume at the exchange.