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Elevator Pitch
I have a Hold investment rating for Coinbase Global, Inc. (COIN), which describes itself as “a leading provider of end-to-end financial infrastructure and technology for the cryptoeconomy” in the company’s listing prospectus.
In this current article, my focus is on Coinbase’s shift to Non-fungible tokens or NFTs. I am positive on COIN’s plans to launch an NFT marketplace, which should have a positive impact in terms of revenue diversification assuming that it is a success. On the other hand, COIN’s shares are under pressure due to cryptocurrency price volatility and it will take time for the company’s diversification plans like the NFT marketplace to bear fruit. This suggests that a Hold investment rating for COIN is appropriate.
What Are NFTs?
Prior to discussing Coinbase’s involvement with NFTs, it is worth looking at COIN’s definition of NFTs in the first place.
On its website, COIN defines NFTs as “a special kind of cryptoasset in which each token is unique” which can act as “certificates of authenticity for digital artifacts.” Coinbase also differentiates NFTs from “‘fungible’ assets like Bitcoin (BTC-USD) and dollar bills, which are all worth exactly the same amount.”
Some Examples Of Applications For NFTs
coinbase.com
What Is Coinbase NFT?
On October 12, 2021, Coinbase announced on its blog that it is going to start “Coinbase NFT, a peer-to-peer marketplace” which it claims “will make minting, purchasing, showcasing, and discovering NFTs easier than ever.” Subsequent to that, COIN disclosed recently on January 18, 2022 that it is collaborating with Mastercard Incorporated (MA) to “provide a better customer experience on Coinbase NFT” which involves Mastercard becoming one of the payment options.
In a nutshell, Coinbase NFT is a marketplace that will make it much easier for investors to purchase NFTs. As it stands now, investors have to first get a “self-custody wallet” or “crypto wallet” (Coinbase Wallet is an example) to store cryptocurrencies that they bought at some platform, and they then still have to visit another platform to purchase NFTs separately with their crypto wallet. It is obvious that the current process of procuring NFTs is cumbersome, and this naturally limits the number of people who are willing and able to get into the NFTs space.
At the J.P. Morgan Crypto Economy Forum held on November 30, 2021, COIN highlighted that the NFT marketplace will function in a way that “if I already have a Coinbase account and I already have Ethereum in it, and I can just buy an NFT right there.” Coinbase also added that the NFT marketplace will be focused on “social experience” and “be more like Instagram” with “people you follow in feeds for cool stuff”, instead of “eBay (EBAY) or an auction.” With the recently announced partnership with Mastercard, COIN’s NFT marketplace should be even more accessible with people having the flexibility of paying for NFTs with Mastercard as well.
However, do note that Coinbase’s NFT marketplace has yet to be officially launched, with consumers prompted to “join the watchlist to get early access” when they visit the NFT section of COIN’s website. In terms of timing, Coinbase had earlier guided at the company’s Q3 2021 earnings call on November 9, 2021 that “you will see something (the NFT marketplace) launched in the next couple of quarters here.”
Coinbase Stock Price Prediction
There is a mismatch between the Wall Street analysts’ price target for Coinbase and their expectations of COIN’s future revenue growth, notwithstanding positive news flow relating to the upcoming launch of its NFT marketplace.
Based on the assumption that sell-side target prices are usually set with a one-year time horizon, the market consensus’ view is that Coinbase’s stock price will rise by +89% from $191.97 as of January 21, 2022 to $362.70 in the next one year. The sell-side analyst who is the most bearish on COIN has a price target of $225 for the stock, which equates to a decent +17% upside. On the other hand, the most bullish Wall Street analyst sees Coinbase’s shares worth $500, which implies a capital return potential of as much as +161%.
The market currently values Coinbase at consensus forward FY 2022 and FY 2023 price-to-sales multiples of 5.8 times and 5.3 times, respectively based on financial data sourced from S&P Capital IQ. Although COIN’s valuations don’t appear to be excessive, there is significant uncertainty over the company’s future revenue outlook. As per S&P Capital IQ data, Wall Street analysts expect Coinbase’s revenue to jump by +471.3% in FY 2021, before witnessing a topline contraction of -3.2% in FY 2022 and delivering a +11.0% sales growth in FY 2023. COIN’s revenue outlook for FY 2022 and FY 2023 seems lackluster, and this is linked to modest expectations about future cryptocurrency prices.
At the time of writing, the prices of Ethereum (ETH-USD) and Bitcoin are at new six-month trough levels, and this is negative for COIN which is heavily dependent on transaction revenues. In its listing prospectus referred to at the start of this article, Coinbase has cautioned that “substantially all of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets.” COIN also warned that “any declines in the volume of crypto asset transactions” and “the price of crypto assets” will hurt its topline.
In other words, revenue diversification as a means of reducing its reliance on crypto assets plays a critical role in determining Coinbase’s future financial outlook and its stock price performance going forward.
At Citi’s 11th Annual FinTech Conference on November 15, 2021, COIN acknowledged that “crypto markets” and its “transaction revenues” are “unpredictable”, which makes it important for the company to “be very nimble in our product road map (highlighting the planned NFT marketplace launch as an example) to meet our customer needs.” Separately, Coinbase described cross-selling synergies with multiple products at the Goldman Sachs US Financial Services Conference on December 7, 2021, where it highlighted the company’s strategy to “expand your (user’s) set of services with us over time” by having users “getting exposed to other assets” after “they become more immersed in the crypto economy.”
It is very clear that Coinbase appreciates the need to diversify its revenue base, and the NFT marketplace will be one of the key initiatives in that respect. Notably, an analyst from Bank of America has forecasted that COIN’s total revenue contribution from transaction revenues (primarily cryptocurrencies) as a percentage will decline from 96% in 2020 to 84% in 2023. Of course, the Bank of America analyst’s estimates are dependent on whether COIN can execute well on revenue diversification initiatives like the NFT marketplace.
In my opinion, Coinbase’s share price could potentially see a rebound to $200 (+17% upside as implied by most conservative sell-side price target) in 2022, but it is not likely to rise to the mean sell-side analyst target price of $362.70. I explain the reasons for my price prediction in the final section of the article.
Is COIN Stock A Buy, Sell, Or Hold?
COIN stock is a Hold and not a Buy for two key reasons. Firstly, the company is a “show-me” investment case where investors need to be convinced that it can deliver on its revenue diversification plans such as the NFT marketplace before its shares can see a re-rating. Secondly, Coinbase’s financial performance and share price will still be very much affected by volatility in cryptocurrency prices during the company’s transition into a more diversified company.
On the flip side, a Sell rating will be too harsh, taking into account COIN’s mid-single-digit forward price-to-sales multiples and the future potential of the NFT marketplace (which still has to be proven though).