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April 14, 2021, 11:37 a.m. EDT

Should you buy Coinbase? The valuation is ridiculous, based on this math

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By David Trainer, Kyle Guske II, and Matt Shuler

Even though Coinbase’s revenue surged over the past 12 months, the company has little to no chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion.

The crypto markets are very young, and we expect many more companies to compete for the profits Coinbase /zigman2/quotes/225893452/composite COIN -2.54% enjoys today. As the cryptocurrency market matures, we expect Coinbase’s transaction margins to drop precipitously.

The race-to-zero phenomenon that took place in late 2019 with stock trading fees will likely make its way to the crypto trading space. We expect Coinbase competitors to cut their trading fees to zero in an effort to increase market share.

Coinbase’s expected valuation of $100 billion implies that its revenue will be 1.5 times the combined 2020 revenues of two of the most established exchanges in the marketplace, Nasdaq Inc. /zigman2/quotes/205547889/composite NDAQ +2.15% and Intercontinental Exchange /zigman2/quotes/209108507/composite ICE +0.97% , the parent company of the New York Stock Exchange.

Our calculations suggest Coinbase’s valuation should be closer to $18.9 billion — an 81% decrease from the $100 billion expected valuation.

This rest of this report aims to help investors sort through Coinbase’s financial filings to understand the fundamentals, using more reliable fundamental data, and valuation of this upcoming direct listing.

Cryptocurrency market remains niche

In its S-1 filing, Coinbase notes “crypto has the potential to be as revolutionary and widely adopted as the internet.” While such a statement can lead to lofty valuations based on a “growth story”, the reality is the cryptocurrency market remains far from “mainstream”.

According to data analytics firm CivicScience , 66% of U.S. adults are “not interested in” crypto and 18% have “never heard of it.” Similarly, CivicScience finds that while the number of people investing in cryptocurrencies is rising quickly, it still remains low at just 9% of U.S. adults. For reference, Pew Research Center estimates 90% of U.S. adults used the internet in 2019.

Read: ‘You can’t ignore’ bitcoin anymore, warns Morgan Creek’s Mark Yusko

A mature market could crush profitability by 98%

As a leading cryptocurrency exchange and brokerage firm in a nascent market, Coinbase charges a large spread on each trade and a trading fee (the greater of a flat fee or a variable percentage fee based on region, product feature and payment type) — both of which are unsustainably high.

In 2020, Coinbase collected about 0.57% of every transaction in fees, which totaled $1.1 billion in trading revenue on $193 billion in trading volume. These trading fees made up 86% of revenue in 2020. If we assume a similar breakdown of Coinbase’s reported $1.8 billion in total revenue in the first quarter of this year, trading fees would equal around $1.5 billion on $335 billion in trading volume, or about 0.46% of every transaction.

Read: Coinbase says first-quarter sales topped $1 billion

As the cryptocurrency market matures and more firms inevitably pursue Coinbase’s high margins, the firm’s competitive position will inevitably deteriorate. For example, if stock trading fees are any indicator for crypto trading fees, we should expect them to quickly go lower if not to zero. Competitors such as Gemini, Bitstamp, Kraken, Binance, and others will likely offer lower or zero trading fees as a strategy to take market share, which would start the same “race to the bottom” that we saw with stock trading fees in late 2019.

Similarly, if traditional brokerages begin offering the ability to trade cryptocurrencies, they will most certainly cut down on the unnaturally wide spreads in the immature cryptocurrency market.

For example, if Coinbase’s revenue share of trading volume fell to 0.01%, equal to traditional stock exchanges, its estimated transaction revenue in the first quarter would have been just $35 million instead of an estimated $1.5 billion.

To get a sense of just how untenable Coinbase’s competitive position is, Coinbase’s estimated transaction revenue as a percent of trading volume in the first quarter was 46 times higher than Intercontinental Exchange, which runs the New York Stock Exchange (among others) and Nasdaq Inc., which runs the Nasdaq. The likelihood of Coinbase maintaining such high fees is very low in a mature market.

Coinbase also recognizes that future profitability could fall when management notes it will “meaningfully increase investment in sales and marketing” — likely to defend its market position from rising competition.

In its first-quarter update , the company guided for sales and marketing expenses to be between 12% and 15% of net revenue in 2021, which is a significant increase from 5% of net revenue in 2020. Rising expenses as a percent of revenue would hurt margins going forward while the firm’s valuation implies margins will hold steady.

Current profits are a drop in the bucket compared to expectations

Coinbase stands out against recent IPOs due to the fact it actually generates a profit. Coinbase grew revenue by 139% year-over-year in 2020, and core earnings, under our calculation, improved from -$17 million to $317 million over the same time. In the first quarter of 2021, revenue grew more than 9 time year over year (YoY).

These results are impressive, and Coinbase may be a good company, but COIN, at $100 billion, is not a good stock, as we show below.

Coinbase is priced to be the world’s largest exchange by revenue

Our  reverse discounted cash flow (DCF) model  allows us to illustrate how overprice COIN is.

To justify its expected $100 billion valuation, Coinbase must:

  • Maintain a 25% margin on net operating profit after tax (above Nasdaq’s 19% but below Intercontinental Exchanges’ 31% in 2020) and

US : U.S.: Nasdaq
$ 258.37
-6.73 -2.54%
Volume: 11.75M
May 14, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$52.81 billion
Rev. per Employee
US : U.S.: Nasdaq
$ 164.36
+3.46 +2.15%
Volume: 698,063
May 14, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$26.40 billion
Rev. per Employee
$ 113.26
+1.09 +0.97%
Volume: 2.16M
May 14, 2021 4:00p
P/E Ratio
Dividend Yield
Market Cap
$63.13 billion
Rev. per Employee
1 2
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