There's a lot of talk about Coinbase's IPO but there's not that much clarity
on what the company should be valued at and so today I'm gonna be helping you
figure out at what prices Coinbase is a screaming buy to a
screaming sell What's up everyone, my name is Ben, I'm a
former JP Morgan investment banking analyst and welcome to rareliquid the
best channel for tech investing. Before I begin I did actually post two videos
about Coinbase last month- one about the company's business and
another about the company's financial statements so
if you have the time make sure to check those out because I go more into detail
about the company Today's agenda is pretty simple, I'll
first be going over the company's latest quarterly earnings report
I'll then discuss coinbase's evaluation and lastly I'll finish off with what I
personally plan to do and please remember I am not a financial
advisor so please treat all content as for education and entertainment purposes
only First off, let me set the stage for our
discussion on valuation by updating you with the company's latest earnings
announcement Ahead of the company's IPO, Coinbase
released Quarter 1 2021 earnings last week and it sent news media outlets a
buzz given its incredible results To highlight some of the numbers, the
company revealed 56 million verified users,
6.1 million monthly users, and 11.3% market share, 1.8 billion dollars in
revenue, 730 to 800 million dollars in net income,
and 1.1 billion dollars in adjusted EBITDA
All these numbers by themselves are already pretty impressive but what I've
done is spread the past nine quarters of
Coinbase's financials and key business metrics
onto an excel spreadsheet and looking at all of this
in an overview and seeing what trends we can spot really shows how
impressive coinbase's results have been Let's start off with the financials.
I know there are a lot of numbers here but you really just need to pay attention to
the past few quarters where you'll see that Coinbase has been
on a huge upswing in terms of revenue and is a highly profitable business. The
latest quarter was actually pretty insane. The company generated 1.8 billion
dollars in revenue, which is almost equivalent to
the past two years of revenue combined If you've watched my previous Coinbase
video it also shouldn't surprise you that the company's EBITDA and net income
margins are increasing, given that the company hardly spends
anything on marketing. Let's next go into some key metrics that help provide
additional context behind these numbers As you probably know the crypto market
overall has been growing like crazy over the past few quarters from 782 billion
dollars to 2 trillion dollars, which has led to triple digit growth
rates for crypto assets held on Coinbase for the past two quarters
In the past quarter, users also grew by 30% to 56 million,
trading volume increased by 276% to 335 billion,
and monthly transaction users increased by 118%
to 6.1 million. So obviously Coinbase is just going gangbusters right now and the
question on everyone's mind is what should the company's valuation be
This leads us to the next part of the video, which is Coinbase's valuation
The hard thing about valuing Coinbase as a company is that the company's results
are so tied to the cryptocurrency market which as you probably know
are highly volatile. But with that said I think it's important to use data to try
to structure your thoughts about valuation as much as possible
so let's dive into some numbers. Here is an overview of the model I've built and
let me walk you through each part First off, in order to eventually get to
our range of prices, I've built the model to have a conservative case,
base case, and optimistic case which if you change the switch here in this cell
will toggle between these three cases In our conservative case, I assume a
pretty steep crash in the crypto market which results in a 20%
decrease in quarter two of 2021, then a 35%
decrease and then a 50% decrease. Now if you're super super bullish on crypto you
might think that such a drop might not happen but just remember back
a few years ago around 2017, the cryptocurrency market
actually dropped by 80% in less than a few months. In my base case scenario I
assume zero percent growth because Coinbase's latest quarter was such a
huge jump I think it's reasonable to assume that
there are up and down quarters that even out to zero percent growth for the year
And in my optimistic scenario I assume a 25%
growth next quarter which linearly decreases to a 10%
growth. Given that coinbase's revenue has jumped so high,
I think it'll be tough to imagine the company's revenue will see high double
digit or triple digit growth quarter to quarter. With these three
cases, here is what our revenue looks like
In our conservative case, 2021 revenue is 4.6 billion, which represents 264%
year-over-year growth. In our base case 2021 revenue is 7.2 billion, which
represents 464% year-over-year growth, and in our
optimistic case 2021 revenue is 9.6 billion which represents a 652%
growth. Let's next use these revenue figures to structure some thoughts about
coinbase's valuation In this row here what you see is
Coinbase's share price which starts at $250
because that was what was announced as a company's reference price
and I then grow the share price by 25%. I then multiply by Coinbase's fully
diluted share count and add net debt to calculate the company's enterprise value
for each share price For this next part of the video I'll be
going over Coinbase's implied trading multiples, and if you're not really sure
with what the trading comp evaluation methodology is, I made a video
about that so check that out if you're interested. But really briefly
trading multiples show how much investors are willing to pay for a
company and so the higher the multiple, the more expensive or possibly
overvalued a company is, and the lower the multiple,
the cheaper or possibly undervalued a company is. What you see here are the
three different cases and their implied 2021 revenues,
and the corresponding trading multiples, which is enterprise value or the
company's total value divided by the implied 2021 revenue. Now
is a part of the video we've been working towards. Let's now compare
coinbase's revenue multiples to some comparable companies
to see how Coinbase compares. To briefly go over them Square and Paypal are here
because they offer crypto related services,
Nasdaq and Intercontinental Exchange operate the largest US exchanges,
and Snowflake and Crowdstrike are two of the fastest growing tech companies in
the world So since there are so many numbers here
let me just focus on the 100 billion valuation which a lot of news outlets
have been focusing on From a multiple perspective a 100
billion valuation results in a range of a 10 times to 22 times revenue multiple
for a company with 264 percent to 652 in revenue growth, and this growth vastly
trumps the growth of any of Coinbase's comparable companies
As a result you may think that this implies that Coinbase deserves a higher
multiple than all these other companies, especially given that coinbase has
a significantly higher EBITDA net income margin than any of the comparable
companies, but what you have to keep in mind is
that the rest of the companies all have more stable businesses
than Coinbase and you can count on their growth rates building over time
On the other hand for Coinbase, if the crypto market were to crumble at any
point Coinbase's revenue would probably go
negative for an extended period of time whether it's a few quarters or a year or
maybe even a few years, and so any revenue multiple even beyond
five times would be way too much for the company
This really points to the challenge of valuing Coinbase with any traditional
valuation methodology because Coinbase is just unlike any other business
But of course I will share with you my thoughts on what I plan to do based on
this data Based on the numbers we went through
together here I personally believe that coinbase has a very realistic shot of
attaining the base case scenario of revenue in 2021,
resulting in 7.2 billion dollars in revenue this year,
and 464 year-over-year growth. This is because since quarter one, the
cryptocurrency market has continued to go up and so quarter two revenue may
actually exceed quarter one and so that leaves some cushion in the
latter half of the year for some down quarters
With all this in mind, my range that I'd be comfortable paying for Coinbase
shares is $250 to $313 which implies a 65 billion to 82
billion dollar valuation This results in a 9 to 11 times revenue
multiple which I think is pretty fair for a company that is poised to grow
exponentially as the cryptocurrency market grows and has an operationally
efficient business model With all this said of course there will
be huge downturns with Coinbase's stock when the cryptocurrency market also
faces downturns and so that's why I don't plan to establish a position more
than 50% of the total position I want to have
with this company over the next let's say a few weeks or months. Another
thing I want to mention is that I don't plan to have coinbase represent
any more than five percent of my total holdings in my portfolio at any time,
just because the quarter over quarter results are so
variable and so tied to the cryptocurrency market but I do think
that over the long run in the next let's say 10 years, Coinbase
will continue to defy expectations. And if you'd like to follow
my trades and see the exact time I buy into the company or sell any other
shares, or if you want access to the model like the ones I built for Coinbase,
make sure to check out my Patreon in the description below. I also plan to
make another video about Coinbase later this week so be sure to be on the
lookout for that and this wraps up the video. Thank you so
much as always for watching, hope to catch you in the next one, thanks
and peace out [Music]