Coinbase, to the moon?
Updated: May 14, 2021
Cryptocurrency exchange, Coinbase has just made a big splash in public markets.
Its shares floated at $381 valuing the company at $100 billion immediately making it one of the 100 most valuable companies in the US.
The new listing and hefty valuation mark another milestone for cryptocurrency as the asset class has swollen to a market capitalisation of over $2 trillion and its biggest coin, Bitcoin, has grown over 400% in the last 6 months.
It's no wonder investors rushed to get a piece of the company. Coinbase’s business model means its top-line is tied to activity and volume in Crypto markets, for some, a bet on Coinbase is a bet on crypto.
Coinbase allows its users to buy, sell and store cryptocurrencies, it also acts as a broker and market-maker. They make their money by charging fees on buy and sell orders as well as for storing cryptocurrency in their digital wallets.
It's no surprise then that Coinbase has been a beneficiary of this year's crypto-craze. In Q1 Coinbase made $1.8 billion in sales, $800 million net income and saw retail customers rise to over 56 million.
Its fundamentals seem solid, but some wonder if the numbers are enough to justify an eye-watering 79x. trailing revenue multiple (Coinbase’s revenues for the last 12 months divided by its market value). Even for a tech company that’s pretty steep.
Some think investor optimism is misplaced. As a first mover Coinbase has benefitted from being a big fish in a small pond, but as cryptocurrency continues to expand the pond has to expand with it. Kraken, another Cryptocurrency exchange, has intentions of going public in the near future and established players like Square and Paypal offer larger customer-bases similar services.
As players continue to fight for customers, fees will have to fall and margins will narrow. With transaction fees making up 90% of Coinbase’s revenues investors will have to question whether initial forecasts were a little too optimistic.
Coinbase doesn’t just have competition to worry about. Bitcoin alone consumes 121.36 Terawatt-hours a year, more than Argentina and the Netherlands. The asset-class’ continued expansion is already drawing ire from environmental activists. Regulators have also been keeping a close eye on crypto markets and the Biden administration is set to lay out rules concerning taxation and infrastructure in the near future.
Coinbase is well-positioned to take advantage of growth in the cryptocurrency market but investors looking to capitalise on the crypto-craze may be better off just buying the coins themselves.