Bitcoin

Key Takeaways

  • Coinbase’s direct listing next week is expected to be well received by the market. 
  • Expected valuation multiples upon COIN’s listing imply substantial and sustained growth for years to come. 
  • Coinbase’s stock price will provide another gauge of institutional interest and sentiment towards crypto at large. However, COIN will also be subject to market risk that may or may not impact crypto asset prices, so it won’t serve as a perfect proxy. 
  • The price of COIN will fluctuate greatly depending on forward guidance and growth expectations as well as the valuation multiple it winds up commanding. Recent trends away from growth towards value, however, could weigh on Coinbase’s stock price as it certainly sits in the former category.

We’re just a week away from Coinbase’s highly anticipated direct listing and there’s no shortage of speculation surrounding its public debut. Rumblings in recent weeks have pegged the company’s market cap anywhere between $68-90 billion, though alternative trading venues like FTX currently imply a ~$120 billion market cap for the crypto giant, which will trade under the ticker COIN. Notably, the high end of that range would put Coinbase in the top 70 largest publicly traded companies in the U.S., wedged between industrial conglomerate General Electric ($118B) and asset management giant BlackRock ($121B).

Much of the attention has fallen on Coinbase’s expected valuation, specifically in relation to its 2020 financials, which showed top line revenue of ~$1.28 billion last year, a nearly 140% increase from 2019. Assuming a $68 billion market cap, Coinbase would start trading at ~53x trailing 12M revenue; at $120 billion, that multiple is closer to 94x T12M sales. For perspective, the market-cap-weighted average trailing P/S for companies in the Russell 3000 Growth Index is ~32x.

But stocks don’t trade on past results; they trade on future expectations, and stock prices are determined by both expectations for future profitability and the valuation multiple a company can command. The latter is largely determined by market conditions and a stock’s growth profile, which is part of the reason there’s so much excitement and hype around Coinbase’s listing next week.

Earlier today on Coinbase’s earnings call, the team reported an estimated ~$1.8 billion in total revenue for Q1 2021 on $335 billion in trading volume. Assuming the increase in trading activity is sustainable, similar results over the next three quarters would put Coinbase on pace for ~$7.2 billion in revenue for FY 2021, or 460% year-over-year growth compared to 2020. This could very well turn out to be too conservative as some investors foresee a greater acceleration in top line growth for 2021; Jeff Dorman and the Arca team, for example, believe Coinbase’s total revenue could grow as much as ~800% this year to ~$11.5B. Under such assumptions, COIN would trade at just 5.9x forward sales (assuming a $68B market cap), a stark difference from its trailing value (note: $120B market cap equates to ~10.4x forward sales). For context, the market-cap-weighted average forward P/S of the aforementioned growth index is ~9.1x (forward P/S uses next 12M sales estimates).

Given Coinbase’s high growth profile, it wouldn’t be surprising to see COIN trade at a significantly higher multiple; it’s not implausible that the stock winds up trading closer to 15-20x forward sales, which would imply a ~$172-230 billion total market value in the aforementioned scenario.

Under more modest growth assumptions, however, the numbers can change materially. Using today’s earnings call as a rough reference point, let’s assume Coinbase grows top line revenue at a more modest rate of 400% in 2021, implying total year-end sales of $6.4 billion; assuming COIN trades at 15-20x forward sales, its total market value would be ~$95-128 billion. On the flip side, COIN could very well demand a forward P/S multiple of 25-30x if the party in equity markets continues, implying a market value closer to ~$160-192 billion.

Notably, major securities exchange stocks like Nasdaq or ICE or the London Stock Exchange tend to trade between 5-10x forward sales, but their growth forecasts pale in comparison to the expectations for Coinbase. Unlike these incumbents, Coinbase’s trajectory is tethered to an emerging asset class that has yet to permeate institutional portfolios in a material way, which is why we expect COIN will trade at a significantly higher multiple.

It’s very possible Coinbase’s growth accelerates if it can continue to attract millions of new users; verified users grew 23% between 2018 and 2019 and another 34% between 2019 and 2020, reaching 43 million in Q4 of last year. Earlier today, Coinbase disclosed it had 56 million verified users at the end of Q1 2021, representing an impressive 30% quarter-over-quarter growth compared to Q4 2020.

Margins are also trending in the right direction and are expected to improve over the coming quarters. In 2020, Coinbase reported an adjusted EBITDA margin of just over 40%; in Q1 2021, adjusted EBITDA was approximately $1.1 billion, equating to a 20 percentage point margin improvement. Similarly, the major exchange stocks tend to trade between 16-24x forward EV/EBITDA, so assuming total revenue of $7.2B this year, a 60% EBITDA margin implies a market value of $69-104 billion using the above EV/EBITDA range; $10B in sales would imply a market value range of ~$96-144 billion.

Speculate, Rinse, Repeat

At the end of the day, much of Coinbase’s valuation will depend on how substantial and sustainable its growth trajectory turns out to be, at least for the next few years. It’s easy to see why this listing has caused so much controversy; one could easily make the argument the stock is grossly overvalued while another could point to similar high-end growth forecasts to make the case it’s undervalued even at $90-100 billion. Either way, Coinbase is all but guaranteed to be one of the largest companies by market value relative to major exchange stocks when it lists on Nasdaq next week.

It’s also important to understand the market backdrop surrounding Coinbase’s direct listing; while growth stocks have underperformed year-to-date, investors are still hungry for growth opportunities, especially ones that offer differentiated exposure. In addition, the lack of compliant vehicles or investable assets forced large cohorts of investors to sit on the sidelines during the latest crypto market surge; pent up demand for crypto exposure could serve as another key demand driver. Remember, valuation multiples tend to be poor predictors of short-to-medium term stock performance as equities can always get more expensive.

Coinbase’s valuation could be justifiable if the exchange giant continues to garner significant market share among institutional investors and traders. Coinbase has already positioned itself as the go-to brokerage for high-profile bitcoin purchases; the firm facilitated Tesla’s recent $1B bitcoin purchase as well as MicroStrategy’s initial purchases worth $425M last summer via Coinbase Prime.

The company has carved a name for itself as the staple platform for onboarding large investors and institutions, many of which face outsize scrutiny and stricter mandates that require the institutional-grade services Coinbase provides. Institutions will remain critical to Coinbase’s long-term success; of the ~$192 billion of reported trading volume in 2020, institutional users were responsible for ~$119B, or 62% of last year’s total volume.

Key Considerations & Final Thoughts

  • Fee compression — eventually this is likely to occur, but most likely not for the foreseeable future. 
  • Market risk — the price of COIN will fluctuate with broader market risks. For example, if growth stocks continue to struggle relative to value peers, investors may be less inclined to pay a higher multiple for COIN. 
  • Valuations for growth stocks are trading at significant premiums relative to historical average (see chart below for example index). 
  • Coinbase’s share price will serve as a proxy for institutional interest and sentiment towards crypto, but it’ll be far from a perfect gauge. The price of COIN will fluctuate with the broader equity market, and may even fall victim to sell-offs in the great growth versus value debate, but its fundamentals make it one of the purest plays on the expansion of crypto available to mainstream investors.

Kevin Kelly, CFA Calendar
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