We initiated coverage on shares of Coinbase Global (COIN) with a Buy recommendation and a 12-month target price of $400, asserts analyst Chris Kuiper in CFRA Research's flagship newsletter, The Outlook.
We start with the assumption that cryptoassets are here to stay. Not only has this invention solved a longstanding problem in computer science, but we think more solutions and services will continue to be built on top of this ecosystem.
Just like how the internet and then the mobile phone ushered in a wave of new services and companies, we think the invention of native digital assets that allow for the storage and transfer of value without the need for an intermediary will spur a wave of new applications.
However, the question for investors is: will Coinbase become the Amazon (AMZN) of the cryptoeconomy? In its current form, Coinbase is just an exchange and brokerage platform for users to convert fiat currencies (like the U.S. dollar) into cryptocurrencies and store, trade, or send them; nearly all of Coinbase’s revenue is derived from transaction fees.
This is not to detract from the value Coinbase has already created and will continue to create. E-Trade took advantage of the explosion in personal internet connections during the dot-com era, giving users an easy way to take control of their investing (remember the ETrade “so easy a baby can do it?” ads?).
Similarly, Coinbase was one of the first companies to provide an easy, safe, and intuitive way for retail customers to buy bitcoin and other cryptocurrencies, and will continue to do so, in our opinion. Our bear case scenario assumes Coinbase will continue to grow as an exchange but does not attribute any value to future products or services.
What if buying bitcoin is just the beginning? Just as Amazon.com realized the internet’s potential far exceeded only offering an online service to buy and sell books, Coinbase’s vision is to move beyond just offering a place to buy and sell bitcoin.
We are already seeing Coinbase start to move along this path by offering additional services and subscriptions, and its strong brand name and already established customer base could give it an advantage as crypto expands into other industries.
Any view on Coinbase necessarily includes a view on where the prices of cryptoassets are heading. Coinbase’s revenue is highly levered to the price of bitcoin and other cryptoassets. Therefore, any opinion on the value of Coinbase necessarily embeds a view on where you think the value of all cryptocurrencies are heading.
As of April 15, the market cap for bitcoin was nearing $1.2 trillion, while the total cryptocurrency market topped $2 trillion. To put this into perspective, the total market cap for all mined gold is $10-$12 trillion.
We think over the short to intermediate term (next 12 months), bitcoin could reach $100,000 or more per coin based on the past “halvening cycles” that bitcoin experiences every four years due to its pre-programmed monetary supply schedule that cuts its inflation rate in half.
We think this current cycle could be fueled by a rise in demand from corporations and institutional investors that are increasingly viewing bitcoin as an alternative asset or even alternative treasury reserve, store of value, and potential inflation hedge.
Investment Thesis and Valuation Given how new the crypto environment still is, we present what we see as two very different paths for Coinbase. While these two scenarios are very far apart in their valuation estimates, we think it is important for investors to increase their range of outcomes proportionate to the risk and uncertainty.
For each scenario, we use a two-stage discounted cash flow (DCF) model (with a 10-year explicit forecast) that uses the perpetuity method for the terminal value, a 3% long-term growth rate, and a 6.5% weighted average cost of capital (WACC), which is higher than financial exchange peers at approximately 5.0%-5.5% due to a higher assumed beta for Coinbase, given the volatility we expect.
Bear Case — $23 billion market cap or $120 per share.
To start, Coinbase is a pure-play company on bitcoin and other cryptoassets. The company does not offer other financial services like investing in traditional equities or payments, etc., and we do not see this changing.
Therefore, any value attributed to Coinbase needs to start with the belief that the cryptoeconomy has value and is here to stay. While we think this to be true, if it turns out crypto has absolutely no utility and is purely a vehicle of speculation, then Coinbase’s ultimate value is $0.
However, for our bear case, we assume cryptoassets do and will serve a purpose and provide value, and that Coinbase will continue to operate in its current form as an exchange. We assume revenue grows by a compound annual growth rate (CAGR) of 19% over the next decade.
While this is certainly above average, we note that this is equivalent to a conservative 200% growth rate in 2021 (Coinbase released preliminary Q1 2021 results showing a 944% year-over-year increase in total revenue) and then dropping down to 10% growth for the next five years and only 5% growth after that — the organic growth rate for financial exchanges.
This equates to Coinbase generating revenue of $6.8 billion by 2028, equal to Intercontinental Exchange’s current revenue (Intercontinental owns the New York Stock Exchange).
Operating margins are assumed to stabilize at 30%, much lower than exchange peers that operate at 50%-60% margins, and we assume significant capex or acquisition expenses to continue to fund growth. We think Coinbase will face stiff competition in the exchange space and trading fees will be compressed.
Bull Case — $166 billion market cap or $840 per share.
Just like Amazon realized the internet and e-commerce revolution wasn’t limited to selling books or even only merchandise online, Coinbase believes the crypto revolution isn’t only about giving people an on-ramp to buy crypto.
Rather, the company is looking at being the number one name in the cryptoeconomy. Therefore, we assume Coinbase does what Amazon did in terms of revenue growth in the 10 years following the e-commerce revolution.
We assume Coinbase’s revenue grows at a CAGR of 36% for the next decade, slightly below Amazon’s 40% CAGR from 1998 to 2009. This equates to Coinbase’s revenue exceeding $19 billion by 2027, or slightly above current annual revenue at Charles Schwab (SCHW).
However, unlike Amazon, we assume Coinbase can ramp operating margins to 50%, where other financial exchanges currently operate. To be clear, this is not to say we predict or even believe Coinbase will be the next Amazon of the crypto world!
This is only to bound our scenario analysis on what could be a very optimistic bull case and assess how high of expectations investors would be implicitly paying for Coinbase to achieve. (Although note this market cap is still well below Amazon as we assume a steady-state terminal value after this growth period, something Amazon has still arguably not yet hit.)
Risks: First, Coinbase’s business and operating results are highly leveraged to the nature, volatility, and price of cryptoassets. Thus, the company is dependent on the growth of the cryptoeconomy.
Second, any kind of cybersecurity event, hack, or breach could be detrimental to Coinbase’s business or brand. Third, Coinbase is subject to an extensive and highly evolving regulatory landscape.
