Coinbase is unlike any market debut Wall Street has ever seen

Coinbase is poised to get an astronomical valuation when the digital currency exchange goes public on Wednesday. But ask 10 market experts how the company should be turn into appreciated and you will probably get 10 answers.

That’s because Coinbase’s current operations – the one that generated a whopping $ 1.8 billion in estimated revenue in the first quarter and up to $ 800 million in net revenue – are based almost entirely on bitcoin and ethereum’s performance.

Those cryptocurrencies have skyrocketed by more than 800% and 1,300% respectively in the past year. As a result, Coinbase, the most popular place for US investors to buy those assets, has grown nine times.

Should Coinbase enter the public market around its last private market valuation of $ 100 billion, considering a fully diluted number of shares, it would immediately be one of the 85 most valuable US companies.

This is the main question for investors ahead of the Nasdaq debut: what happens when a crypto company with historically abnormal growth, massive uncertainty and no official headquarters clashes with the hardships of Wall Street and well-known statistics like price-to-sale and price to profit ratios?

“Valuing a start-up can be challenging, but I think the issue of valuation is much more complex at a company like Coinbase,” said Natalie Hwang, founder of managing partner at investment firm Apeira Capital. She currently has no stake in the company.

Forecasting crypto prices has proven to be a reckless game. Fluctuations can be so rapid in either direction that Coinbase has 27 points in its prospectus about the volatility risks. They include changes in investor confidence, negative publicity and social media coverage, regulatory issues and service disruptions related to the technology.

Because the underlying assets that make up Coinbase’s financial story are so unpredictable, fundamental analysis of the quality of revenue, customer retention, and efficiency won’t get you far. Coinbase evangelists don’t spend much time on it.

Rather, they are looking towards a future where financial intermediaries are declining and transactions mainly take place on the blockchain. Online ecommerce, travel and home buying marketplaces, they say, will use a variety of cryptocurrencies to connect buyers and sellers, with blockchain serving as the universal source of truth.

Coinbase calls it the “crypto economy,” a word that appears 163 times in its prospectus. It predicts a software-powered world of payments, trading, and all kinds of peer-to-peer transactions that take advantage of blockchain’s ability to uniquely identify everything.

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

Matthew Le Merle, managing partner of investment firm Fifth Era and Blockchain Coinvestors, said linking Coinbase’s value to bitcoin would be like valuing Amazon in its early days based on book sales, or posting multiples on Airbnb five years ago by looking at the number. of booked rental nights.

“You’re not thinking about bitcoin volatility, trading fees and earnings,” said Le Merle, whose company specializes in crypto and has exposure to Coinbase through investments in some venture capital funds. “You have to start with – what is the profit pool of the world’s digital money and assets? In that context, these are trillions and trillions of dollars going to get out.” ‘

Regardless of what the future holds, Coinbase’s earnings at least this year will be largely driven by transaction volume, which is currently closely tied to bitcoin prices. Coinbase charges a fee for transactions that vary based on transaction size.

In last week’s first-quarter earnings report, Coinbase said it had 6.1 million monthly transacting users (MTUs). Should crypto prices soar, MTUs could reach 7 million for the year, Coinbase’s most aggressive estimate. In the mid-range, assuming a flat crypto market, MTUs would land at 5.5 million. The most conservative forecast, assuming prices will fall, is 4 million MTUs.

Coinbase skeptics envision a fee-dependent company in a market where a growing number of rivals can get aggressive with prices. For example, the popular Robinhood app does not charge fees for crypto purchases.

Stock research firm New Constructs wrote in a report last week that competition from companies like Kraken, Gemini and Binance will eat up Coinbase’s future earnings, leading to a “race to the bottom” similar to what happened in stock trading. The company said that Coinbase should be valued at $ 18.9 billion, or 81% below its expected market cap, according to its analysis.

“As the cryptocurrency market matures and more companies inevitably pursue Coinbase’s high margins, 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 gain market share.”

Susquehanna, a research and trading company, is much more optimistic about Coinbase, estimating a market cap of $ 96 billion to $ 108 billion. That’s a price-to-sale multiple for Coinbase’s 2023 sales of between 11 and 12, a premium over the peer group average of seven due to the company’s “high growth,” Susquehanna wrote last week.

Almost all of that growth for Coinbase comes from the large volume of bitcoin and ethereum transactions. The company goes public during a crypto super bull market that saw bitcoin rise from less than $ 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 to make that happen again. The risk factors section of Coinbase’s prospectus addresses that point in the first two items.

The former says financial results will fluctuate based on the crypto market. The second says that revenues are “substantially dependent” on crypto prices and volumes and that “if any such price or volume falls, it would negatively affect our business, bottom line and financial condition.”

But perhaps these evaluations have all been mishandled.

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

The correct way to think about Coinbase, says Lee, is to imagine where the Internet was in 1994 before Netscape effectively turned the lights on for the average consumer by providing a way to surf. Likewise, Coinbase is bringing the complex concept of crypto into the mainstream, allowing the masses to learn about and invest in it.

The more people start to read and hear about various projects emerging within the crypto economy, the less they will focus on the bitcoin chart, Lee said.

“For many people who day trade Coinbase, they will be fixated on the price of bitcoin,” Lee said in an interview. “For people who are long-term investors and see everything happening, not just with bitcoin, but with the 40, 50, 60, 100 tokens that make all these other use cases possible, they will realize that Coinbase is an index to the other things that are being built. “

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

“This is diametrically opposed to a traditional platform that has to ‘tax’ or ‘charge’ creators to generate revenue,” Lee, whose company is an investor in Rally, said in a follow-up email.

Rally has its own network token that investors can buy and sell as they would bitcoin, although on Coinbase it is only available on the custodian for institutional buyers.

In addition to the many altcoins on the market, there is the recent explosion of non-replaceable tokens (NFTs) or digital assets living on the blockchain. Athletes have sold highlights video clips for hundreds of thousands of dollars each, while artworks have sold for millions of dollars.

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

The Origin Token is available for purchase on Coinbase and is currently trading for $ 2.39. That is more than 20 times more than in 2021, even after a decrease of more than 20% in the past week.

Origin co-founder Josh Fraser is in the camp of true crypto believers and expects rapid market adoption in the financial and commercial sectors. He points out that PayPal has a market cap of more than $ 300 billion, with a growth rate hovering around 20%.

“There’s no reason to say that Coinbase shouldn’t be valued higher than a PayPal worth nearly $ 300 billion, especially with the multiplier attributed to disruptive technology stocks,” Fraser wrote in an email from Taiwan. “The addressable market for money itself is huge and Coinbase would be one of the best picks and shovels plays for this.”

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