Coinbase $COIN - A busted story or multi-bagger in the making?
Assessing the long term prospects
Market cap: US$ 15B
Coinbase - One of the hottest new listings of 2021. Now has 80% of its value wiped out from its highs. Is it a busted company with dubious future or just one that is going through a “cooling off” phase from the IPO frenzy of 2020/21? Could it be a potential multi-bagger?
Let’s take a look.
But before I get into the details, a few caveats:
Coinbase stock has a high correlation with the cryptocurrency market movements.
It is near impossible to value the company with much degree of certainty on a short term basis. This is understandable due to the highly volatile nature of the crypto market. The only way I can analyse the company (like most companies) is by taking a long term view, typically 5-7 years.
If you are not a believer of the crypto market in general over the long term / think it is some kind of ponzi scheme or something like that… there is no point of wasting one’s precious time to read the rest of this post. (Which is perfectly ok - I am not offended. :) Having differing opinions is what makes a market!)
Now, assuming you decided to read further… let me share my analysis and conclusion.
QUICK BACKGROUND:
COIN 0.00%↑ is the largest crypto exchange in the US and among the top 3 globally.
Among crypto exchanges, Coinbase is also perceived to be the most regulatory compliant, and therefore is a partner of choice for many institutions getting into the space. In fact, for many markets, Coinbase management has been active in shaping the crypto regulations too.
I have been thinking a bit about what is the closest business model to Coinbase in traditional finance world. Is it the exchanges such as CME, ICE (Intercontinental Exchange), SGX (Singapore Exchange)? Or is it brokers like IBKR (Interactive brokers) or even HOOD? I have heard others even compare it to a bank of sorts due to the custody aspect.
In reality, it is probably a combination of all of the above. Which is where it becomes a bit more tricky to apply fundamental and valuation comps to Coinbase, implying we need to get a bit creative as we will in the later part of this note.
REVENUE MODEL:
TRANSACTION FEES - 85% of their revenues.