Coinbase is different from any market debut Wall Street has ever seen

Coinbase plans to order an astronomical valuation when the digital currency exchange is announced on Wednesday. Just ask ten market experts how the company should do it be appreciated and you will probably get ten answers.

This is because the current business of Coinbase – the one that generated a whopping $ 1.8 billion in estimated revenue and up to $ 800 million in net revenue in the first quarter – is based almost entirely on the performance of bitcoin and ethereum.

Over the past year, cryptocurrencies have soared by more than 800% and 1,300% respectively. As a result, Coinbase, the most popular spot for US investors to buy assets, has grown nine times over that period.

If Coinbase were to reach the public market around its latest $ 100 billion private market value, taking into account a fully diluted stock, it would immediately be one of the 85 most valuable US companies.

Here’s the key question for investors ahead of the Nasdaq debut: What happens when a crypto company with historically deviant growth, high uncertainty and no official headquarters clashes with the rigor of Wall Street and well-known metrics such as price-to-sales and price to earnings ratios?

“Valuing a new business can be challenging, but I think the issue of valuation is much more complicated at a company like Coinbase,” said Natalie Hwang, founder of investment firm Apeira Capital. She does not have a current interest in the company.

Predicting crypto prices is a foolish game. Floating can be so fast in any direction that Coinbase has 27 bullet points in its prospectus on volatility risks. These include changes in investor confidence, negative publicity and coverage on social media, regulatory issues and service disruptions related to the technology.

Because the underlying assets that make up Coinbase’s financial story are so unpredictable, the fundamental analysis of earnings quality, customer retention and efficiency is not very far off. Coinbase evangelists do not spend much time on it.

On the contrary, they are looking to a future in which financial intermediaries are reduced and transactions take place mainly in the blockchain. According to them, online markets for e-commerce, travel and home buying will use different cryptocurrencies to connect buyers and sellers, with blockchain being the universal source of truth.

Coinbase calls it “cryptoeconomy”, a word that appears 163 times in its prospectus. It points to a software-driven world of payments, trading and all sorts of peer-to-peer transactions that leverage the ability of blockchain to give everything a unique identifier.

If Coinbase bulls are right, the company is at the center of a critical transformation of the internet. Some compare it to Netscape, which introduced the browser to consumers. Others look at how Amazon brought physical retail to the Internet or how Facebook became the way people connect.

Matthew Le Merle, managing partner of investment firm Fifth Era and Blockchain Coinvestors, said the value of Coinbase to bitcoin would be like valuing Amazon in the early days based on book sales, or a multiple on Airbnb five years ago post by looking at his number of rented nights booked.

“You do not think about bitcoin volatility, trading fees and income,” says Le Merle, whose firm specializes in crypto and has exposure to Coinbase through investments in some venture funds. “You have to start – what is the profit pool of the world’s digital money and assets? In this context, it is trillions and trillions of dollars that are going to move hands.”

No matter what the future holds, Coinbase’s revenue at least up to and including this year will be largely determined by the transaction volume, which is currently closely linked to bitcoin prices. Coinbase pays a fee for transactions that vary depending on the transaction size.

In its earnings report for the first quarter last week, Coinbase said it had 6.1 million monthly transactions (MTUs). Should crypto prices rise, MTUs could reach 7 million for the year, Coinbase’s most aggressive estimate. In the middle range, if a flat crypto market is accepted, MTUs will end up at 5.5 million. The most conservative forecast, assuming prices fall, is 4 million MTUs.

Coinbase skeptics see a company relying on fees in a market where a growing number of competitors can become aggressive with prices. The popular app Robinhood, for example, does not charge a fee for cryptocurrencies.

Equities research firm New Constructs wrote in a report last week that competition from companies such as Kraken, Gemini and Binance would eat into Coinbase’s future fee income, which would lead to a ‘race to the bottom’, similar to what happened in stock trading. The firm said that according to its analysis, Coinbase should be valued at $ 18.9 billion, or 81% below the expected market capitalization.

“As the cryptocurrency market declines and more companies inevitably pursue the high margins of Coinbase, the company’s competitive position will inevitably deteriorate,” New Constructs wrote. Competitors “are likely to offer lower or no trading fees as a strategy to take market share.”

Susquehanna, a research and trading company, is much more optimistic about Coinbase and estimates a fair value market value of $ 96 billion to $ 108 billion. This is a price-to-sales multiple for Coinbase’s 2023 revenue of between 11 and 12, a premium on its peer group average of seven due to the company’s high growth, Susquehanna wrote last week.

Almost all of the growth for Coinbase comes from the large amount of bitcoin and etherum trading. The company was introduced during a crypto-super bull market that saw bitcoin rise from under $ 30,000 at the end of 2020 to $ 60,000 today.

But in 2018, bitcoin lost 75% of its value, and there are no rules against it happening again. In the risk factors section of Coinbase’s prospectus, the first two items consider this.

The first says that financial results will vary according to the crypto market. The second says that revenue is “substantially dependent” on crypto prices and volumes and that “if such a price or volume falls, it will adversely affect our business, operating results and financial condition.”

But perhaps these evaluations are all wrong.

Roger Lee, a partner at Battery Ventures, which invested in Coinbase in 2017 at a valuation of $ 1.6 billion, currently calls bitcoin the “least interesting thing” about crypto. So there is no sales multiple that makes sense.

The right way to think about Coinbase, Lee says, is to imagine where the Internet was in 1994 before Netscape turned the average consumer on the lights by a way of browsing. Similarly, Coinbase brings the complex concept of crypto into the mainstream so that the masses can learn and invest in it.

The more people start reading and hearing about different projects popping up in the crypto-economy, the less they will focus on the bitcoin chart, Lee said.

“For many people who trade Coinbase one day, they will stick to the price of bitcoin,” Lee said in an interview. “For people who are long-term investors and see everything not only with bitcoin, but with the 40, 50, 60, 100 tokens that make all these other uses possible, they will realize that Coinbase is an index for the other things being built. ‘

Lee, for example, pointed to Rally Network, a service that allows creators and artists to launch their own coins on the ethereum blockchain without knowing how to code. Creators can reward fans with tokens, which can then be used to buy goods such as merchandise or concert tickets. Unlike most artist sites, there is no fee for the host.

“This is in contrast to a traditional platform that creators have to ‘tax’ or ‘charge’ to generate revenue,” says Lee, whose business is an investor in Rally, in a follow-up email.

Rally has its own network proof that investors can buy and sell as they would bitcoin, but on Coinbase it is only available for the custodial service for institutional buyers.

In addition to the many altcoins on the market, there has been the recent explosion of non-fungible tokens (NFTs), or digital assets residing in the blockchain. Athletes sold video clips with highlights for up to hundreds of thousands of dollars each, while works of art sold for millions of dollars.

In February, Justin Blau, the DJ and musician passing by 3LAU, auctioned off a series of songs, art, and videos as NFTs, raising nearly $ 12 million in the process. For the NFT technology, he has partnered with Origin Protocol, which powers crypto markets and e-commerce sites.

The Origin token can be purchased on Coinbase and is currently trading at $ 2.39. It has increased more than 20 times in 2021, even after falling more than 20% in the past week.

Josh Fraser, co-founder of Origin, is in the camp of cryptocurrencies and expects a rapid market adoption in finance and commerce. He points out that PayPal has a market capitalization of more than $ 300 billion, with a growth rate of about 20%.

“There is no reason to say that Coinbase should not value more than a PayPal at almost $ 300 billion, especially with the multiplier allocated to disruptive technology stocks,” Fraser wrote in an email from Taiwan . “The responsive market for money itself is huge, and Coinbase is one of the best performers and shovels for this.”

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