Anyone who wants to buy Bitcoin, Ethereum, Litecoin, or other numerous cryptocurrencies on the market can hardly avoid one of the established crypto exchanges. Coinbase, one of the most popular crypto trading platforms, is now venturing onto the big trading floor. The Initial Public Offering (IPO), i.e., the first issue of Coinbase shares, is to take place on 14 April 2021. The company only filed its S1 Filling with the United States Securities and Exchange Commission (SEC) on 25 February.
But what can investors expect from the Coinbase IPO? Is it worth investing in today, or what is a realistic expected return? We have looked at the company's history, the business model, the current market development, and the management and evaluated the share from today’s perspective. To find out now whether Coinbase is a sensible investment for you as an investor.
Coinbase’s development in recent years
In the first major part of our company evaluation, we want to look at the historical development of Coinbase. From the historic growth of a company, conclusions can regularly be drawn about the behavior of the founders of the management.
First of all, we would like to point out that Coinbase has been around since 2012 — Bitcoin was the first cryptocurrency to emerge in 2009. Accordingly, Coinbase is not a company that has only recently jumped on the crypto hype and now wants to use the good market phase to collect money from investors. However, the company is probably also consciously using the current market phase to issue its own shares at a good issue price — this is a sensible move from a business perspective. But now, let’s take a look at some of the most important events of the past few years.
Coinbase foundation in 2012
The founding of Coinbase can be traced back to 2012. Brian Armstrong and Fred Ehrsam founded the company as part of the Y Combinator — a startup incubator. The Y Combinator has already produced other startups such as Reddit or Airbnb — with Coinbase. Another highlight was to follow. At the time, Armstrong was still working as a developer at Airbnb, while Ehrsam earned his bread and butter as a currency trader at Goldman Sachs.
After the company raised venture capital of 5 million US dollars from angel investor Fred Wilson in May 2013, another round of financing was to follow in December 2013. There, Wilson again invested with his VC Union Square, the VC Andreessen Horowitz, and Ribbit Capital. By the end of the year, Coinbase had already received 31 million US dollars in venture capital.
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These investments should also pay off because, already in 2014, Coinbase counted more than 1 million active users who bought cryptocurrencies such as Bitcoin or Ethereum via the platform.
Coinbase — the development of the business model
What is particularly exciting about Coinbase is the development of its business model. On page 93 of S1 Filling, the company does an excellent job showing how it managed the transition from a transaction-based business model to a service and subscription model. In particular, in the early years, Coinbase generated revenue by sending and receiving transactions. At the end of 2013, services for investing followed.
From mid-2015, Coinbase set up its own service for payments, thus ensuring recurring revenues. New services also followed in 2017 and 2018. However, things became really exciting in 2019, at the latest when Coinbase changed its own business model to profitability and repetitive revenues. With Save, Borrow & Lend, Stake and Build, strong and competitive services are now available.
The company has also integrated 15 different blockchain protocols. In this way, customers can now trade or store more than 90 cryptocurrencies — and the offering continues to grow.
Fundamental valuation of Coinbase
Investors who now think that Coinbase is merely a hype company should now take a closer look. This is because the company addresses three fundamental customer groups with its platform:
Retail users: users who use the basic functions of Coinbase. These include the classic private investors who buy, hold, sell, lend or stake cryptocurrencies.
Institutional users: This user group includes hedge funds, fund managers, financial managers, and companies. Through Coinbase, these users gain access to a sophisticated trading platform with advanced storage capabilities. Besides, Coinbase is one of the most liquid trading platforms on the market.
Ecosystem Partners: Coinbase provides developers, traders, and issuers with access to services that make participation in the ecosystem easy and accessible. In this way, the involvement of this relevant customer group is increased.
However, it is not enough to know which customer groups the company addresses. Rather, it also depends on an evaluation of the respective customer group — this is where the company knows how to convince. At the end of the last quarter of 2020, i.e., still at the beginning of the current hype, the customer group was divided as follows:
- 43 million retail users
- 7,000 institutional users
- 115,000 ecosystem partners
Fascinatingly, Coinbase has been able to increase its user base by 20 million customers in the last three years. This equates to a growth of around 87 in the period under review. Compared to other start-ups, this may seem slow at first glance. However, the balance sheet data paints a different picture here, as Coinbase is already very profitable today.
It also shows that Coinbase users have a high level of involvement with the platform. A look at the company’s market share shows that despite an increasing number of users in the crypto market, Coinbase is profiting at an above-average rate and is rapidly increasing its market share. In 2020, around 11.1% of the total market capitalization could be attributed to Coinbase.
The Coinbase balance sheet figures in the analysis
However, it is even more exciting to put the company's good fundamental development with the key figures — and here Coinbase can really convince in my view. In the following, I have broken down the company’s balance sheet again in detail.
As recently as 2019, Coinbase’s revenue was $533 million. For a company that was only founded in 2012, these are already convincing figures. Nevertheless, of this half a billion, the bottom line was only a net profit — or rather a loss — 30.4 million US dollars. In principle, such a small loss is nothing surprising for a start-up. After all, the company invests the earned capital in further growth. This is made clear by the cost item of 185 million US dollars, which was spent on technology and development.
However — and this really convinced me during my analysis — the turnover more than doubled in 2020. At the end of the year, Coinbase achieved a turnover of 1.28 billion US dollars. At the same time, the costs for technology and development increased to 271.7 million US dollars. Accordingly, Coinbase is investing even more capital in the further expansion of its business model. At the end of the day, however, a net profit of 322 million US dollars remained.
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If we also take the 2.8 million monthly users that Coinbase reported in Q4 of 2020, this corresponds to a turnover of around 450 US dollars per user per year, or 38 US dollars per month. At first glance, a turnover of 38 US dollars per capita may not seem particularly high, but if one compares this with companies such as Netflix, which achieve a disproportionately higher turnover but, calculated based on turnover per user, end up with “only” 10.26 US dollars per month.
Besides, the Coinbase share also convinces with a high-profit margin of around 25%, which should increase in the future due to economies of scale. I personally expect this to be more than 30% in the long term.
In general, I see Coinbase as an exciting investment because the platform is an infrastructure provider in the crypto industry. To trade cryptocurrencies, investors need to use a platform like Coinbase. The strong growth of the platform shows that this is often Coinbase.
How does Coinbase make money?
On its balance sheet, Coinbase shows three different sources of income:
Revenues from transactions: Currently, this business line is the most important source of income for Coinbase. If investors buy cryptocurrencies via the platform, they incur fees for this. In the fourth quarter of 2020, revenues from this line of business amounted to $476 million.
Revenue from subscriptions and services: The second and inspiring revenue source for Coinbase is subscriptions and services. Subscriptions make revenues more predictable. Institutional users, in particular, pay Coinbase money for the data. Services like Coinbase Earn or Staking also generate predictable and recurring revenues.
Revenues from other sources: The final sources of revenue are other types of income. This includes consulting services, for example.
What is a realistic valuation for the Coinbase share?
In summary, based on the figures, Coinbase is not only a growth company but can also convince with its own profitability at the same time. I personally expect Coinbase to trade with a high earnings multiple of more than 200. Only recently, the group was valued at 67.6 billion US dollars. Other analysts also consider a market capitalization of more than 100 billion US dollars possible.
Personally, I think Coinbase is a fascinating company based on the figures. However, the share price is likely to be decisive, because rationally speaking, the expected return on Coinbase must also be positive for the coming years.
Other popular blockchain stocks such as PayPal or Square could be a guide to a fair valuation. PayPal, for example, comes to a P/E ratio of 65.4 in 2020, while Square even has a P/E ratio of 453.
With a market capitalization of 67 billion US dollars and an outstanding share count of 254 million, the price per share would be 263 US dollars. If we take 100 billion US dollars' market capitalization, the price would be 393 US dollars.
“The price per Coinbase share at the ICO is likely to be between $260 and $400.”
Coinbase valuation by P/E ratio
Accordingly, we have a P/E ratio of 207 to 310 at the start. Compared to PayPal, this valuation seems quite high. However, PayPal’s growth is also slowing — the law of large numbers strikes here. Compared to Square, with a P/E ratio of more than 450, Coinbase seems quite cheap. Square, however, has been convincing with strong growth for some time and is increasingly attracting customers outside the United States.
Coinbase share valuation based on the PEG ratio
An alternative approach that I like to follow with growth companies in valuation based on the PEG ratio. Basically, this puts the P/E ratio and the expected growth about each other. In the case of Coinbase, we have an expected PEG ratio in the range of 207–310. In the last financial year, Coinbase was able to grow by more than 100 percent. With the increasing acceptance of cryptocurrencies — most recently even Tesla is said to have invested in BTC via Coinbase — growth is likely to increase even more.
Accordingly, I consider a value of 200% quite realistic here. If we put the PEG ratio in relation to growth, it is between 1.035 and 1.55. Based on the specialist literature, a PEG ratio of more than 1 corresponds to an overvaluation. However, Coinbase is a rapidly growing company, so values below 2 are also quite attractive.
Discounted cash flow model for Coinbase valuation
I also classically apply the discounted cash flow (DCF) method in the context of a share valuation. However, in the case of Coinbase, I have explicitly decided against it. The reason for this is that Coinbase is still growing at a rapid pace.
In principle, the DCF method is a good way to assess whether an established company is still achieving the required growth targets. Here, I personally mostly work with return targets of at least 12% per year.
The Coinbase share carries these risks
Now let’s take a look at the opportunities and risks of the Coinbase share. I want to start with the risks because investors should always keep these in mind when investing. A good approach to analyzing risks is Porter’s 5 Forces Model. According to this, four basic risk groups should be considered in an analysis:
First and foremost, the competitive situation should be emphasized. Coinbase is not the largest platform on the market. Binance records a larger trading volume and more visitors on average. And Kraken is also one of the more popular platforms on the market.
All platforms offer very comparable services and only differentiate themselves with tradable assets, fees, and individual services. So, in the long run, other competitors could displace Coinbase with better offerings. New competitors will also emerge and disrupt the entire market with new services or better fee structures.
A second threat to Coinbase is its own customers. The crypto market is highly fragmented today. No exchange supports the trading of all cryptocurrencies. Accordingly, investors have to use several platforms. In doing so, customers also get to know other providers and decide on a possibly better alternative.
Also, there is the risk that customers will lose interest in cryptocurrencies in the future. If customers no longer see any potential here, it will be difficult for Coinbase to market its own product. On the contrary, users reduce their own transactions in bad market phases and thus directly influence Coinbase’s business — declining sales are to be expected here.
This point somewhat coincides with the first aspect of the competitors. After all, they can retain customers with good alternative offers. DeFi services, in particular, are likely to gain relevance in the future. So if Coinbase misses one of these trends, competing products are likely to gain relevance.
In my view, there is no real risk for Coinbase here. Suppliers or vendors do not exist in the traditional form. However, market data can be transmitted incorrectly — a flash crash of some crypto prices would be the immediate consequence.
States and regulation
A risk that is no longer part of Porter’s 5 Forces but should be taken into account is the regulatory risk. If important countries like the US decide to regulate Coinbase, this could have a huge impact on the business model.
Risks of the Coinbase share
- Declining interest in cryptocurrencies
- Competitors gaining market share
- New competitors with more innovative products
- Insufficient economies of scale
- Loss of confidence after hack
The chances of a Coinbase investment
On the other side of the coin, investors must also evaluate the opportunities of investment. There are a few points here, which I have, however, highlighted in the previous course of the analysis.
From my point of view, some points are particularly relevant. For example, there is the possibility that Coinbase will further increase its own share of the total transaction volume. As a direct consequence, the company would achieve higher revenues and increase its own profits.
There is also the possibility of attracting even more investors to cryptocurrencies. In this way, Coinbase could increase its own revenue per capita. In particular, the profitability can be described as very good for a growing company. If Coinbase manages to maintain profitability as its business grows, this would positively impact the stock.
Overall, there is a possibility that Coinbase will become the Amazon of the crypto industry. Accordingly, even a valuation of over $60 billion at market launch may still be too low to value the company fairly.
Opportunities for the Coinbase share
- Growth can be sustained
- Cryptocurrencies gain relevance
- Subscription revenues continue to grow
- Stronger role with institutional investors
- New services for new revenue streams
Brian Armstrong — Visionary CEO underlines the positive impression
In the last step of a share valuation, I still look at the management or the company's founders. Influential personalities such as Jack Dorsey, Elon Musk, or Jack Ma have convinced me to invest in the respective companies.
Brian Armstrong is one of these visionary leaders. On the Coinbase blog, you can always read Armstrong’s contributions. From my perspective, this is an excellent quality, because only people who do good and also talk about it can profit from it in the long run. What fascinates me is that Armstrong doesn’t just keep an eye on short-term developments. Rather, he is pursuing a goal, a mission, with Coinbase.
And it is precisely this mission that the entire staff of the company is pursuing. Every employee has a clear goal that they all work towards together. According to Armstrong, Coinbase is not a big family either, but a sports team that convinces with performance.
Coinbase’s mission is to create an open financial system for the world. That means we want to use cryptocurrencies to bring economic freedom to people around the world.” — Coinbase Mission
How do I buy Coinbase stock at launch?
If you’ve read this far, you’re probably wondering how to buy some of the company’s 254 million shares at IPO. Since it is a direct listing, investors have no way to buy the stock at a fixed market price. Rather, the share will start trading directly and will subsequently settle based on the principle of supply and demand.
Investors can, therefore, simply invest in Coinbase through their custodian bank on 14 April 2021.
Conclusion: Buy Coinbase or rather wait?
Finally, the question naturally arises as to whether Coinbase is a buy or whether investors should remain on the sidelines for the time being. In my view, Coinbase presents itself as a strongly positioned growth company in one of the largest and most exciting growth markets.
The company is already profitable and could start trading at an exciting valuation. On the other hand, the business model comes with some risks. On the one hand, sales depend heavily on the interest of market participants for cryptocurrencies. On the other hand, the market is still quite young, and as interest increases, more competitors will emerge.
I will buy some Coinbase shares at the start of trading with a high probability and add to them on a weighted basis over the following weeks. I find it particularly interesting that I can profit significantly from the Bitcoin hype with Coinbase. If Bitcoin continues to develop positively , I strongly believe that Coinbase will also develop well. However, a multiplication of the stock market value seems rather unrealistic to me in the short term.
How will Coinbase go public?
The IPO of Coinbase will take place via a direct listing. This means that Coinbase will go public without an intermediary. Other companies such as Slack or Spotify have already opted for this approach to the IPO.
Where can investors subscribe to the Coinbase share?
Coinbase is placing the share in a direct listing on the stock exchange. This means that no new shares are issued, but the shares of existing shareholders become tradable on the stock exchange.
What does Coinbase do with the fresh equity from the IPO?
In a Direct Listing, no new shares come onto the market. Accordingly, Coinbase does not sell shares to market participants, but existing shares only become tradable on the stock exchange.
How many Coinbase shares will there be?
In the first step, there will be 254 million shares. In the future, a new issue may well be possible. However, investors have to be careful here because a new issue will result in a dilution of the ownership shares.
Is it worth buying Coinbase shares?
The company is working on a vision and pursuing it as the business continues to develop. For this reason, Coinbase can be expected to remain a fixture in the market. So as interest and trading volumes of cryptocurrencies like Bitcoin increase, Coinbase’s profits can also be expected to rise. With a margin of more than 25 %, Coinbase could thus become a profit machine.
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