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Coinbase Remains on Track for Future Dominance

1 John Chapter 4 verse 9 states, "This is how God showed his love among us; He sent his one and only Son into the world that we might live through him."


What does it mean to be a Christian? For me, it means to acknowledge that God is the creator of all. And as part of this, to affirm that He sent his only son Jesus Christ to live a life as a man (and also God) on earth, to die on the cross for all the sins of humanity, and to rise from the dead and ascend to Heaven so that we could be accepted by God from His works. This is God's love for us, and I need only accept this to receive salvation.


Sacrifice and service are always key principles when it comes to obeying God. I find these to be true for helping others in any way. I like helping others and one way I know I can do this for investing related topics is to provide unbiased data as part of my assessments. I may have my own opinions and strategies, but creating transparency as part of the process through information to help depict what I am saying can be very valuable.


Coinbase Global, Inc. (COIN) had a spectacular year in 2021. The SP was down modestly on Friday due to the extreme range in guidance for 2022. Judging from Wallstreet's initial estimates, the Street is being extremely conservative over the short-term based on the wide range provided for 2022. The regulatory environment also adds to the uncertainty discussion.


There are a couple important points that I think investors should be paying attention to with COIN. First, the company generated an Adjusted FCF Margin of 50% for 2021. This is a spectacular feat. Second, the company's Subscription & Services segment witnessed the highest growth rate of all of its operating segments. This segment is poised to eclipse the $1 billion mark by 2023 based on estimates, and will be an important growth driver over time.

There's a lot to like about COIN as the company has a Net Cash position of $4.3 billion. COIN went public via a Direct Listing as the company did not need to raise capital, alluding to its financial strength. Despite phenomenal growth in 2021, the company is currently trading just over 4 times EV/Revenue and less than 10 times Adjusted FCF/Share. This is due to the Street's expectations for Revenue to drop towards $7.1 billion for 2022, and the company's admitted uncertainty with respect to Crypto pricing.

COIN clearly saw robust performance across the board driven by peak Crypto prices during 2021. Later in the year, prices fell, but did recover in Q4. The market isn't giving COIN any premium based on 2021 performance as Wallstreet Revenue estimates for 2022 and 2023 sit at $7.1 and $8.1 billion respectively. I believe that these are conservative estimates.


I have adjusted COIN's OCF/FCF information as the company accounts for its Custodial Funds Due to Customers within Operating Activities. I believe that this line item should be accounted for within Financing Activities and as such, do not include it within OCF/FCF numbers, as these funds are specific to customer accounts. Regardless, COIN still generated a 50% Adjusted FCF Margin for 2021 on an adjusted basis. It's still early in the company's business stage, so monitoring the sustainability and/or changes in Cash Flows will be key.

COIN's Revenue continues to be skewed to Retail Transaction Revenue. But Subscription and Services Revenue has become the fastest growing segment. Core metrics for COIN include Verified Users, Monthly Transacting Users, MTUs, Annual Average Retail MTUs, and Average Transaction Revenue per User, ATRPU.


The key for COIN over the short-term is the growth in MTUs and ATRPU performance. Longer term COIN will need to prove that it can further diversify its Subscription and Services Revenue. The utility of blockchains and other aspects including NFTs and DeFi Tokens suggest that Crypto may not necessarily see a commoditization similar to the trading of equities. Additionally, it also makes it difficult today, to have strong transparency on what the future will look like with respect to these variables.


That being said, COIN's trading volume and assets on its platform make a strong case for the company to continue to be a leading innovator and major player in how any future plays out with respect to Crypto. The company is witnessing a strong increase in the penetration of MTUs as a percent of Verified Users. The value add for Subscription and Services Revenue is a key component of growing this penetration further.

Looking at the financial model, and it is highly conceivable that COIN will be able to grow MTUs towards 20 million-plus based on further Verified User growth and MTU penetration. ATRPU remains somewhat murky as to how this will trend. 2021 saw a strong increase, while 2022 is expected to drop back to lower levels. Subscription and Services Revenue will continue to see robust growth.


I continue to be more optimistic for both the short-term and mid-term versus Wallstreet. I agree that COIN may see a decline in Revenue for 2022, but I don't believe that it will be as low. Of course geopolitical tensions may impact this, especially if things escalate with Russia, and/or other parts of the world.


Beyond the next couple years, I see the company's potential tracking towards $20 billion in Revenue over the mid-term. While not exactly the same business models, I do feel that COIN's valuation should be closer to that of Visa, Inc. (V) and Mastercard Incorporated (MA). This is predicated on the core similar traits of a strong network effect driving Revenue and combined high Cash Flow margins.


Putting these pieces together, and COIN is at a very low SP today, affording a solid risk/reward opportunity. My current cost basis isn't great at $259, and I will be watching for any drop in SP towards the $150 level to continue adding to the position.







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