Coinbase Is Not Worth $100 Billion But Its Stock Could Double On Direct Listing

What makes stock prices go up and down? Theory has it that prices should move to the beat of new information that causes investors to raise or lower their estimates of a company’s future cash flows in today’s dollars.

These days that theory seems way off. Instead stocks soar on the realization that their meme-like qualities will spur a flood of social-media spread dopamine to the brains of bored traders who buy them.

This comes to mind in considering an analysis of Coinbase’s April 14 direct listing which concludes that the cryptocurrency exchange is really worth 19% of its $100 billion valuation.

If my dopamine theory is right, rather than plunging in the wake of this gloomy analysis, Coinbase could end its first day of trading at a $200 billion valuation.

Bitcoin’s Meteoric Rise To $1.1 Trillion

I started writing about Bitcoin — a virtual currency that allows people to do business online anonymously — about a decade ago. In February 2011 it traded for less than $1 a coin and by that June its price had soared to $30 — a market capitalization of $130 million.

This helped one clever person earn a hefty gain. As I wrote in June 2011, Mike Caldwell — a Salt Lake City, Utah-based timekeeping software entrepreneur — bought $20,000 worth of bitcoin at an estimated 20 cents a pop. Four months later, he sold it for $3 million — a compound annual rate of return of 45,152%.

Bitcoin is not without its risks. On June 19, 2011 an account breach at Bitcoin exchange, Mt. Gox, led to the devaluation of the Bitcoin currency, from $17.50 to “pennies on the dollar.” In addition, a file with over 60,000 accounts from the service was leaked to the Web.

Bitcoin has recovered in price since then. Caldwell could be kicking himself today for selling too soon. With Bitcoin trading at a record $62,732.30 on April 13, if he had held on to the 200,000 bitcoins he bought in February 2011, his stash would now be worth a whopping $12.5 billion — representing a 264% compound annual rate of return.

Since June 2011, Bitcoin’s market capitalization has enjoyed a relatively modest 152% compound annual rate of return — to $1,172 billion.

Coinbase’s $100 Billion Valuation

Founded in 2012, the cryptocurrency exchange Coinbase is expected to go public in a direct listing on April 14 at a $100 billion valuation.

Coinbase takes a piece of every bitcoin transaction on its platform. In 2020, its revenues totaled $1.28 billion — 86% of which came from those transaction fees. Specifically, Coinbase nabbed about 0.57% of the $193 billion in crypto trading volume in 2020.

Coinbase revenues rose 139% in 2020 from $534 million in 2019, according to its prospectus. The trading volume on Coinbase soared nearly 142% in 2020 from about $80 billion in 2019.

In addition to the rapid growth, Coinbase made a $322 million profit in 2020 (compared to a $30 million loss in 2019).

The first quarter of 2021 brought even faster growth. According to an SEC filing, Coinbase estimated that revenue in the quarter totaled $1.8 billion — 906% more than the first quarter of 2020’s $179 million. Trading volume in the first quarter was $335 billion — 60% more than in all of 2020. And Coinbase estimates its first quarter profit at a range of $730 million to $800 million.

Coinbase is bullish on 2021 — providing three scenarios in terms of different levels of monthly transacting users (MTUs) — of which there were 2.8 million in 2020. In its optimistic scenario, MTUs rise 150% to 7 million; its pessimistic scenario is for a 43% increase; and its mid-range forecast is for 96% growth in MTUs, according to its SEC filing .

The Bear Case Against Coinbase’s Valuation

With all this startlingly rapid growth and considerable profitability, what’s not to like about Coinbase shares? Here are four notable negatives on the stock:

• The $100 billion valuation is more than that of the two largest stock exchanges
• Coinbase’s transaction fee could be driven down by competition
• Coinbase is radically increasing marketing spend to hold on to its market share
• Crypto are not mainstream currencies

High Valuation Compared to Stock Exchanges

Coinbase should be worth less than its $100 billion, according to MarketWatch. How so? Its valuation “implies that its revenue will be 1.5 times the combined 2020 revenues of Nasdaq and NYSE parent, Intercontinental Exchange — two of the most established exchanges in the marketplace.”

Competition Could Drive Down Transaction Fee

Coinbase took in a transaction fee of 0.46% in the first quarter — that is 46 times higher than the fee charged by those two stock exchanges. Crypto trading rivals such as Gemini, Bitstamp, Kraken, Binance, and others, MarketWatch notes, could drive down transaction fees to zero — which would cut into Coinbase’s revenue.

Coinbase’s Increase in Marketing Spend

Coinbase may be concerned about competition and is substantially increasing how much it spends on marketing. Coinbase’s first-quarter update anticipated sales and marketing expense in the range of 12% to 15% of net sales — nearly three times what it spent in 2020.

Crytpo Not Mainstream

Coinbase’s prospectus is bullish on main street adoption of crypto — noting that it “has the potential to be as revolutionary and widely adopted as the internet.”

Surveys suggest much needs to be done to realize that potential. Data analytics firm CivicScience found that 66% of U.S. adults are “not interested in” crypto, 18% have “never heard of it” and only 9% of U.S. adults are investing in cryptocurrencies, according to MarketWatch.

MarketWatch says that the maturation of crypto trading means that Coinbase is 81% over-valued and should be worth $18.9 billion. How so? It estimates that in 10 years its profit margin will fall to the 23% average of 18 Investment Banking & Brokerage Services firms and its revenue will slow down to the Nasdaq’s 21% annual rate.

I think the forces that drove GameStop

GME
to trade at $483 a share in January — now 70% below that high — will take hold of Coinbase when it begins trading on Wednesday.

I am not alone in that. For example, Delphi Digital estimates that COIN could trade at 15 to 20 times forward sales — implying a roughly $172 billion-$230 billion total market value.

It remains to be seen whether Coinbase will surpass the high growth expectations embedded in the potential doubling of its opening market value to a $200 billion market cap.