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Coinbase - Investment Potential is Large, Valuation is Key

Job Chapter 23 verses 10-11 state, "But he knows the way that I take; when he has tested me, I will come forth as gold. My feet have closely followed his steps; I have kept to his way without turning aside."


One great truth that I always get from the Bible and God, is that when I reject His teaching, I tend to stumble. At the same time, when I endure for His glory, the result is always a good and beneficial one. It's never about being "perfect", but about running and finishing the race of life - it's not a sprint, it's a long distance run.

For investing, this is very much the same. No matter what investment, whether a company, commodity, currency, bond, pooled fund, ETF, etc., I will face pressure from the markets broadly, and/or Wallstreet as a direct component of this. It is vital to continue running the investment race, which also is one of long distance.


Coinbase


Review

Coinbase Global, Inc. (COIN) is slated to go public soon. It looks like it will be occurring in March, but it isn't entirely clear yet. The company has filed an initial S-1 Form divulging all of its financials, and hopefully it will be more straight forward than Palantir Technologies, Inc. (PLTR) timing to go public - as both are using a Direct Listing process. Palantir went back and forth on their filing date delaying it longer than what everyone anticipated, eventually even including a lock-up period provision, countering the core use of a Direct Listing.


Coinbase will be dependent on Bitcoin's future, but it should be made clear that the company has a fairly diverse platform of assets, with more so diversity on its trading volume. Of Coinbase's $90 billion Assets on Platform, 70% were Bitcoin at 2020's year-end. For total trading volume, only 41% were for Bitcoin of the $192 billion in 2020. That's right, Coinbase generated $192 billion in trading volume for 2020, with $73 billion for Retail Trading Volume, and $119 billion for Institutional Trading Volume. It also should be noted that Coinbase's $90 billion Assets on Platform reflected 11.5% of the Crypto Market Capitalization $782 billion as of year-end 2020.


In 2020, the price of Bitcoin dropped to $5,000 in March at the low-point, and rose to $29,000 by the end of the year. Still, the average price through all of 2020 was at $11,126. It was not until October 10, 2020, that Bitcoin remained above this average - during this time through all of December, Bitcoin's average price was $17,653. Bitcoin has continued to be volatile since the early days in 2012, however, each new peak has continued to increase, and each level of new users investing in Bitcoin has continued to exponentially increase.


Assuming the recent peak towards $60,000 were to correct, the base would likely be somewhere around $10,000-$15,000, much higher than March of last year. Each higher floor over time is validating Bitcoin's fundamental utility despite continued volatility. Unbanked populations are the true focal point for Bitcoin, however, today's western markets that already have a digitized fiat system, continue to view it as an investment asset.


Coinbase generated a 1.4% margin from its gross Retail Trading Volume to just over $1 billion in Retail, Net Transaction Revenue. The margin from its Institutional Trading Volume was fairly insignificant, but still generated another $56 million - all-in-all, Total Transaction Revenue grew nearly 140% in 2020. The company's Subscription and Services Revenue grew 125% to $46 million, driven mostly by Custodial Fee and Staking Revenue. Coinbase's Other Revenue grew by nearly 170% primarily driven by Crypto Assets Sales Revenue. Verified Users grew by 35% to 43 million, while MTUs grew 2,700% to 2.8 million.


Just over 75% of Coinbase's Revenue was generated within the U.S., so to the point above, the majority of trade volumes are being driven by investment speculation versus utility use of Bitcoin in unbanked environments. Non-U.S. growth did see a faster rate at nearly 170%, however geographic breakdowns were not transparent as to whether western nations were similarly investing in Bitcoin versus unbanked country populations.


Despite the company's diversity with Cryptocurrencies, Bitcoin will likely remain a key gauge for performance. As of March 3, 2021, Bitcoin's average price has been at $40,570, 3.6 times that of the average price in 2020. During the Q1 of 2020, Bitcoin's average price was at $8,268, and if Bitcoin's average price remains near today's average, Coinbase will have its best quarter ever. Coinbased may be on track to see its first $1 billion in Revenue earned in one quarter in Q1 2021. At the same time, the risk of volatility could still see Bitcoin drop back towards lower levels, making it difficult to model any given year.


Coinbase recently was publicly valued from $75 to $100 billion. I am modeling Coinbase with a SP at around $642 per share over the next 18-month period. This assumes the currently published 206 million Shares Outstanding, as well as an EV/Revenue multiple at 35 times, and an FCF per share multiple at 100 times. I am modeling 2022 Revenue at $4.2 billion with FCF margin at 35%. I will confirm the Shares Outstanding, and I am assuming that Coinbase will have a high investment interest and premium towards $100 billion - right now, this would equate to a SP at $490 per share.


Coinbase needs to be measured specifically with FCF as OCF is highly inflated. This is derived from the company's Custodial Funds Due to Customers Cash Flow changes. This line item should not be included as part of the company's scrutinized FCF as it is not a Cash Flow that transacts to the company directly, but rather is held by Coinbase as custodian for customers.


The key for investors is to see at what valuation Coinbase does indeed begin trading on the secondary market. I will consider the level of initiating a position in the company based on this. With market volatility picking up substantially the past few weeks, it is anyone's guess where Coinbase will land.

Financial Metrics on a Last Twelve-Month, LTM, Basis

  • Net Cash Position: $1.4 billion

  • Revenues: $1.3 billion

  • Gross Margin, GM: 89%

  • Operating Cash Flow, OCF / Margin: $3 billion / 235%

  • Free Cash Flow, FCF / Margin: $294 million / 23%

  • Shares Outstanding: 206 million (subject to change from IPO)

  • Total Transaction Rev: $1.1 billion

  • Subscription & Services Rev: $45

  • Total Other Rev: $136 million

  • Verified Users: 43 million

  • Monthly Transaction Users (MTUs): 2.8 million

  • Assets on Platform: $90 billion

  • Crypto Market Capitalization: $782 billion

  • Share of Crypto Market Capitalization: 11.5%

  • Trading Volume: $192 billion

Valuation Metrics

  • Enterprise Value, EV: $100 billion

  • EV/Revenues: 78 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/FCF per Share: 343 times

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