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Coinbase - Wallstreet's Unloved Darling

Hebrews Chapter 7 verse 25 states, "Therefore he is able to save completely those who come to God through him, because he always lives to intercede for them."


This Bible verse is speaking of Jesus Christ being the direct way for anyone in the world to come to God. Jesus Christ is the direct connection to God for humanity, not only byHis life, death, and resurrections from the cross, but also by His intercession for anyone seeking God.


When it comes to Coinbase Global (COIN) I sure feel like I could use some intercession at the moment. Coinbase results are in and they were quite spectacular, so why the muted performance in after-hours and disdain?


The nit-picking of Wallstreet is getting old when it comes to what Coinbase has accomplished the past couple years, as a testament to the longer work put into the company. That being said, what's more nutty is the attempt to think that Coinbase's retail business is at risk now and longer term, not only from competing Cryptocurrency platforms, but also from companies like PayPal Holdings (PYPL), Square, Inc. (SQ), Visa, Inc. (V), Mastercard Incorporated (MA), Goldman Sachs (GS), among other traditional banks and financial institutions. I guess the thought is that any legacy/incumbent can simply pivot towards the next big thing - yea, this rarely if ever happens for far too many reasons that aren't worth getting into right now.


But keeping focused on Coinbase, here's the company's key metric breakdown updated on a Last Twelve Month, LTM basis from the Q1 2021 results:

  • Revenue: $2.9 billion

  • Transaction Revenue, Retail, Net: $2.3 billion

  • Adjusted Operating Cash Flow, OCF/OCF Margin: $1.3 billion/44%

  • Free Cash Flow, FCF/FCF Margin: $1.5 billion/53%

  • Verified Users: 56 million

  • Monthly Transacting Users, MTUs: 6.1 million

  • Assets on Platform: $223 billion

  • Trading Volume/Retail Percentage: $497 billion/36%

Key items here to Wallstreet's nervousness, is that Coinbase's Transaction Revenue, Retail, Net is nearly 80% of Total Revenue, while Retail Trading Volume only reflects 36% of the total. Clearly, the retail side of the business is the key driver for Coinbase's OCF/FCF performance now, so it is very important moving forward as well.


But like many other new platforms, Coinbase has put in the time to build something transformative for the plethora (millions likely) of Cryptocurrencies throughout the world. At the same time, the company has been laser-focused on keeping cybersecurity and a process-based approach to grow the platform and fit into the global regulatory environment. Recent news of Binance's probe is a direct example of how a platform like Coinbase will be able to capitalize through proactively optimizing the safety and security of Crypto trading. There is something to be said of those who have the largest platform by Cryptocurrency options and transactions, versus the largest platforms by quality, efficiency, and security.


When it comes to the fringe players who are looking to establish their own Cryptocurrency alternatives, I suspect that longer term, many will look to "attach" or "append" to Coinbase's platform as they witness the substantial cost impacts to operations. Square is a great example of seeing a substantial acceleration of Revenue performance, while also witnessing an extreme drop in Gross Margin and OCF/FCF margin by substantial proportions in the short-term, even when factoring for Gross or Adjusted Revenue for Bitcoin. This is a testament to the first mover advantage that Coinbase has through its platform, volume, and corresponding OCF/FCF margins.


Can a company like Square simply build its own equivalent Crypto trading platform via its Cash App members to a competitive scale? This remains to be seen, and begs the question of Square's focus from an operational perspective holistically. There are nearly 40 million Cash App Monthly Active Customers, MACs, will they all simply transition to whatever Square throws out the gate, not necessarily. I am more intrigued with Fintech companies targeting banking and credit cards to have a tremendously long runway of growth at the expense of legacy leviathans, versus a company like Square that is looking to diversify into a niche where it is far behind.


Another point that I would like to mention is how to consider Coinbase's OCF activities. I have determined that using an Adjusted OCF metric is warranted as Coinbase has a Customer Custodial Funds line item on the Balance Sheet, B/S. This as most can guess, represents restricted cash and cash equivalents maintained in segregated company bank accounts that are held for the exclusive benefit of customers. For the OCF operating activities, it is prudent to exclude the Custodial Funds Due to Customers as it hits the B/S and is not a Cash and Cash Equivalents item for the company directly. As such, this affords a more explicit OCF and FCF nominal value that is correlated to the company's financial strength.


Coinbase guided to exceed Q1 2021 performance on multiple metrics for Q2. With the FCF margin at 53%, I am looking for a mid-term margin to normalize somewhere in the 30-40% range. As Coinbase is positioned to witness substantial Revenue growth over the next five years, the company truly has an opportunity to justify its valuation in a similar fashion to Mastercard and Visa with EV/Sales at 25 times and FCF towards 50-65 times. We may indeed see a correction for Bitcoin and/or other Cryptocurrencies, but the mid- and long-term trajectories remain robust. Depending on how successful volume and Revenue can ramp up, a mid-term Price Target, PT could track towards $1,200 to $1,500.


Today's Wallstreet concerns are wildly irregular as they express skepticism for both the short- and mid-term. The punishing attitude by Wallstreet against companies that are succeeding through innovation and taking massive market share to scale, is riddled with generational division at the forefront. Coinbase didn't pop up three years ago, and is poised to leverage its first mover advantage into the future. Cryptocurrencies are controversial to say the least, especially as traditional financial companies are not at the forefront. But like the Internet, Cryptocurrencies and Blockchain are already upon us and will continue to shape the future.

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