Terra (LUNA) Valuation — A serious VISA/Mastercard Competitor?
This article is a valuation of the LUNA token. It is the native protocol token of the Terra ecosystem and used to collateralize the system.
Terra is a decentralised stablecoin platform capable of expanding and narrowing its supply to stabilise unit prices. The reserve token is called LUNA which has a fixed supply. LUNA stakers benefit from fee distribution generated by network transaction volume.
A few days ago, Terra has celebrated its 2 year anniversary of existence and 1 year anniversary of its mainnet. The project has already managed to onboard ~20 partners with a total of ~40 billion USD gross merchandise volume (GMV). Through its partners Terra has managed to attract over 1.3 million real users (end customers) within a short period of time. Next to the home market of South Korea, Terra has already expanded to Mongolia. In addition the team plans to expand into Southeast Asia (Singapore, Taiwan, and Thailand) in 2020 and globally in the coming years.
Looking at the transaction volume, we can see a nice and steady growth. Terra has already managed to generate a volume of over $800 million USD and transaction fees of ~$2.5 million USD. Our forecast for 2020 estimates a total transaction volume of nearly $3 billion or an average daily trading volume of ~$7 million USD.
The current tax rate is at 0.675% (set via on-chain governance, between 0-1%) which is very competitive comparing to other payment providers, like Visa or Mastercard where merchants pay ~2.5%. For our tax rewards forecast we estimate an average tax rate of 0.46% for the rest of the year. Together with the transaction volume this will lead to ~$13 million USD in tax rewards, which will be paid to all stakers.
Valuation(s)
As an investor, it is our task to continuously analyse and evaluate possible and existing investments in the best possible way. For the valuation of the Terra project we have decided to use two valuation methods: DCF and PE Ratio
Discounted Cash Flow (DCF)
The DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. For our calculation we use the following parameters:
- Discount Rate: 15%
- Perpetual Growth Rate: 10%
- Exit Value Multiple: 8x
- YoY Growth Rate (TX Volume): 100%
- Terminal Value (TV) Calculation: Average of “Multiple TV” and “Cash Flow TV”
Our assumptions and the DCF calculations above leads us to a marketcap of LUNA of ~$1.25 billion or ~$1.62 per LUNA token.
Price/Earnings (PE)
Given the earning possibilities for investors in the form of rewards (called tax rewards), we have decided to also calculate the price-to-earnings ratio (PE Ratio). This valuation method indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. It is also referred to as the price multiple.
A PE Ratio of 4.9 looks very attractive from an investment point of view. There are sayings, that a PE Ratio should be around the annual growth rate. Given a much higher growth rate for Terra, the current PE Ratio seems quite low.
Additionally we compare the The PE Ratio to the largest competitors. The ratio of Visa is currently at 30, Mastercard’s is about 33.
Next we have a look at our fair token price if we assume different PE Ratios. We are using PE Ratios of 15, 20 and 30 which shows the potential prices if the PE Ratio changes more and more in the direction of its competitors.
Assuming tax rewards of $15 million USD and a PE Ratio of 30 results in a price of $1.48 per LUNA.
Conclusion
After our two valuations of the Terra project and its LUNA token, we can conclude that both valuation methods resulted in a similar fair price. The DCF valuation resulted at a price of $1.62 and the PE Ratio analysis with an assumed PE Ratio of 30 (based on the competition) resulted at a fair price of $1.48.
Averaging those two prices gives us a fair price of $1.55 for 1 LUNA token. According to that we have a growth potential of ~700%. Hence, in our opinion, the LUNA token is strongly undervalued and has a very good growth potential.
We are amazed by Terra’s ecosystem and believe it is set up to grow to one of the biggest payments networks in the future. 🚀
Project Website: https://terra.money
Disclaimer: block42 is not a registered investment advisor, broker/dealer, financial analyst, financial bank, securities broker or financial planner. The information is provided for information purposes only. The information is not intended to be and does not constitute financial advice or any other advice, is general in nature and not specific to you.
We are not paid or mandated to do any of our reviews/valuations. This is just our own opinion. Please always do your own research before making any investment decisions.
