Coinbase, the largest digital asset exchange in the US, has announced plans to go public on April 14.
The traditional IPO process involves hiring investment banks to build support and generate interest, but Coinbase is planning to use the direct listing technique pioneered by companies like Spotify (SPOT) and Palantir (PLTR). This will, among other effects, allow current investors to sell their stock when the company goes public. Technically, this is a Direct Public Offering (DPO) rather than an IPO proper.
What will COIN be worth?
Coinbase has listed 114,850,769 shares of stock, with its Class B shares, which hold higher voting rights, converted to Class A shares. The company also hasn’t announced a share price yet — direct listing means share price will be set by the market when the IPO opens.
We do know, however, that Coinbase is valued at $68 billion, and that shares traded at about $343.58 on the private market in the runup to the IPO announcement. Coinbase’s 11.9 million shares already registered for trading are estimated to be worth $39 billion, and the company has a market cap of about $100 billion.
Gil Luria, director of research at DA Davidson, Coinbase’s first institutional investor back in 2013, has initiated coverage of the company with a buy rating. He projects Coinbase earning $2 billion in revenue in 2021, based on a surge in digital assets trading activity in the first quarter and an ongoing boom in Bitcoin price that has seen the most popular digital asset return to nearly $60,000.
Luria regards this projection as a conservative estimate and has set a price target of $440 per share, based on a starting point of 20 times revenue and revised upward from an initial target of $195 per share after Coinbase reported far better Q1 revenues than expected — an 847% increase, partly based on its IPO announcement. He also expects trading to be volatile on April 14.
How to buy COIN shares
Many investors will want to buy Coinbase stock. Anyone with an ordinary brokerage account will be able to buy COIN from April 14 — just like any other stock.
Why investors are interested in COIN
Coinbase deals in assets that generate returns. That’s an unusual boast in the age of negative yield and low economic growth, and where fiat currencies’ value is inflated away. And the value of digital assets has grown rapidly. In 2018, after a Series E funding round, Coinbase was valued at $8 billion — a figure CNBC then called “whopping”. In 2021 Coinbase’s valuation may be as high as $100 billion. Coinbase makes its income from transaction fees on digital asset trades, and the price trend of these assets is relentlessly up; in 2018, when Coinbase was worth $8 billion, Bitcoin was worth around $6,000. So Coinbase market cap and digital asset prices roughly track.
But Coinbase’s business model is innovative too. It makes money by handling money, but it’s always looking for ways to expand from its core operations: it’s the most common initial onramp for fiat-digital asset trades, but it also offers Cardano (only to Coinbase Pro subscribers at the moment).
Coinbase’s unexpectedly positive earnings report
In its updated Q1 earnings report, Coinbase stated that its revenues had jumped to $1.8 billion, nine times Q1 last year and three times Q4 last year. Net income of between $730 and $800 million is at least four times Q4 2020’s income. That represents a return on sales of almost 60% — unimaginable for even the most profitable software or luxury goods companies, let alone a financial technology startup. That’s attractive to people and funds looking for businesses to invest in rather than assets to hold.
Almost 90% of that income came from revenues on trading digital assets.
Coinbase’s transaction fee schedules:
- Around 0.50% between the buy and sell price for digital assets
- Coinbase fee on digital asset purchases and sales, using a flat fee or a regional variable percentage, whichever is greater
- A spread of up to 2% on conversions between digital assets
- A flat 2% fee to sell collateral against US dollar loans
- 25% commission on staking services
Coinbase charges around 0.5¢ on the dollar for trades, with larger trades paying a lower proportion. Therein lies the rub: Bitcoin trading can be volatile, because Bitcoin prices can be volatile. Coinbase’s 0.5% of this business is highly lucrative, but the volume of trades fluctuates with BTC prices. Coinbase bets the spread to damp the volatility but it’s still heavily dependent on the price of the leading digital asset.
Exposure to digital assets — without the digital assets?
Despite this dependency, some investors will see buying Counbase stock as a way to profit from digital assets trading without directly participating themselves; “Buying Coinbase [stock] could provide a way to participate indirectly. It’s like the person selling picks and shovels to the miners; you don’t have to be a prospector to make money”, says Randy Carver, a registered principal with Raymond James Financial and president and CEO of Carver Financial Services.
In particular, Coinbase hopes to increase the share of trading on its platform accounted for by institutional investors. Currently around 55%, or $122 billion, of Coinbase’s $233 billion in assets came from institutions. But as institutional trading rises, Coinbase’s reliance on Bitcoin pricing falls: “Retail trading volume is more influenced by the Bitcoin price and Crypto Asset Volatility than institutional Trading Volume. As institutional trading increases, we expect the correlation between the Bitcoin price and Crypto Asset Volatility and Trading Volume to decrease”, the company said in its SEC filing.
In addition, investors with little experience of digital assets may feel themselves on more secure, familiar ground dealing with the infrastructure of a stock purchase rather than trading ETH and BTC.
Coinbase’s long-term revenue expectations
Coinbase is making significant revenue — now. But some quarters, revenue falls hard as retail and short-term investors pull out of spiralling digital assets. In the past, that has left Coinbase using the boom quarters to cover for the lower-earning ones. In 2021, Coinbase looks set to be profitable, but it expects to incur around $35 million in one-time expenses in Q2 due to its IPO, and anticipates expenses between $1.3 billion to $1.6 billion for full year 2021; in 2019 the company made a $30.4 million loss, while last year saw a $322 million profit.
The company said in its SEC filing that “We expect our customer base to grow alongside the ecosystem we serve as we continue to support more asset classes and add more products to our platform”.
Perhaps more concerningly for investors hoping to draw dividends from Coinbase’s operations, CEO Brian Armstrong said in the SEC filing that “we may earn money when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate at breakeven, smoothed out over time, for the time being”.
Coinbase CFO, Alesia Haas, told a Q1 results call that the digital assets markets have undergone four major price cycles since 2010.
“We believe we entered the fourth price cycle in late 2020. We do not know where we are, though, in the current price cycle, but we can already see that we expect to reach a peak materially higher than the last all-time high”, she said.
Meanwhile Armstrong said the total digital asset market cap is nearly $2 trillion, of which Bitcoin accounts for 55% — “But crypto is bigger than just Bitcoin—and Coinbase will ultimately strive to support every legitimate cryptocurrency in the market”.