*The following references an opinion and is for information purposes ONLY. It is not intended to be investment advice. Seek a duly licensed professional for investment advice!
In mid-Dec 2020, Coinbase Global Inc., the largest U.S.-based cryptocurrency exchange announced that it had filed with the Securities and Exchange Commission (SEC) for an Initial Public Offering (IPO). The company, on 29th of Jan 2021 announced that it will go public via a direct listing of its Class A common stock. Recent news articles have cited a US$77bn valuation for Coinbase based on the $303 per share price that was traded on the Nasdaq Private Market.
Given that Coinbase filed its S-1 form confidentially with the SEC, there is no publicly available information on the financials of the company, however, using the publicly available information on cryptocurrency trading volume and peer valuation (HKEX, Nasdaq, LSE, and Robinhood’s-private market valuation) based on price-to-sales multiples, I have managed to put together a back-of-the-envelope calculation to value Coinbase.
My model, downlable here, starts with a rough estimate of the revenue Coinbase might have generated in 2020 (based only on estimated transaction fee and custodian fee ) and also a rough estimate of the revenue the company is likely to generate in 2021 assuming the current bull market in cryptocurrency remains till the end of this year, with of course mid-cycle corrections (20–30%). An underlying assumption that drives my valuation of Coinbase depends on the price of Bitcoin (BTC) hitting US$110,000 by end of 2021(or a transaction weighted price of US$45,730 for 2021) vs. a price of US$52,024 at the time of writing this article. Feel free to change the assumptions in the attached model to suit your view of Coinbase. (Pls refer the ‘Business model’ sheet in the model to see other business areas Coinbase can/have entered into — areas traditional exchanges are not able to- but are still at the nascent stages).
Based on TTM financials reported as of Dec 2020 and market prices as of Feb 8th, 2021, I have calculated the valuation multiple for other listed exchanges. Based on those numbers, the Hong Kong Exchanges and Clearing (HKEX) Ltd is trading at a P/S ratio of 36.9x with a dividend yield of 1.20%, Nasdaq was trading at a P/S ratio of 8.1x with a dividend yield of 1.37% and the London Stock Exchange Group (LSEG) was trading at a P/S ratio of 21.3x with a dividend yield of 0.73%. I think the main driver of the high P/S ratios is the dividend yield of these companies, as these companies are able to sustainably payout a large sum of their earnings as dividends given that these companies have i) low topline volatility ii)generate very high operating margins (40–70%) iii) have low reinvestment requirements. As such, it is possible to justify investors looking at their investments in these exchanges equivalent to a low-risk bond with a 0.7–1.4% annual yield vs. the U.S 10-year treasury yield of 1.3%. Interestingly, Robinhood in its most recent private market equity raise was valued at US$30bn or 26x its estimated 2020 revenue. Based on my revenue estimates for Coinbase in 2021 and using a P/S multiple ranging from 8.0–36.9x based on the peers mentioned above my valuation for Coinbase ranges between US$38bn–177bn (see Figure 1 below).
Keeping investor sentiment for IPOs and cryptocurrency aside, I think the valuation investors are willing to pay for Coinbase will depend on investors' view on cryptocurrency and whether they believe ‘Crypto is here to stay or that ‘it will crash by 80% like it did in 2018’. However, the more important question, in my opinion, to ask is ‘who will be the marginal investors in Coinbase on its IPO day?’ The whole $GME debacle comes to mind. 🚀🚀🚀💎💎💎💎
On fundamentals, Coinbase most likely deserves to trade at a valuation premium to Robinhood as Coinbase has a userbase of 43 million users, or 3.3x more than Robinhood (refer to figure 2), and has also outgrown Robinhood in terms of userbase since 2014 given its expanding global reach, with a presence in 42 countries as of 2020, with a lot more room to grow. However, individuals can argue that given the inherent risks in the cryptocurrency industry, which Coinbase operates in, is still at a very much early part of the adoption cycle and is still looked at as having similarities to the ‘Tulipmania’. However, this view is increasingly fading with reputed companies such as Visa and Mastercard working on adopting blockchain and cryptocurrency while companies such as Tesla have announced investments into BTC.
Given the global reach of cryptocurrency investing and high engagement among millennials (refer figure 3), I think Coinbase’s positioning within the space as the top contender (refer figure 4) despite its higher than average transaction fees goes to show that the exchange is well positioned to reap the benefit from growing interest in the cryptocurrency space. As such I think investors looking for exposure to the cryptocurrency space are likley to add coinbase to their portfolio at reasonable valuations.
For now, due to the absence of any bottom-line numbers, a P/S valuation matrix is all we can go by, however, if I assume Coinbase generates a net margin close to 50%, Nasdaq net margin is 32% vs. LSEG 23% vs. HKEX 59% vs. Binance range of 40–60%, based on my calculations done by back calculating based on the amount of BNB burned -more on that in a different blog post. Assuming an 80% payout in 2021, on a target P/S valuation of 26x (similar to Robinhood) then the implied dividend yield for Coinbase would be c. 1.5% in-line with the yield of other exchanges mentioned above.
I end this blog with one thought for you, if you believe in a US$134bn valuation for Coinbanse which is a 1.7x upside from the last publicly available valuation, would you rather hold BTC which could give a 2.1x upside from the current price of US$53,000, as Coinbase valuation is inherently tagged to the performance of the BTC price, as per my model.
But an investment in the Microstrategy share on the day the company announced that it bought BTC (Aug 11th 2020) would have grown by 7.2x to date vs. BTC investment would have underperformed growing by only 4.7x.
