Coinbase Global Inc. (COIN, Financial) is an American cryptocurrency trading platform offering safe and user-friendly technology to its customers to access cryptocurrencies such as bitcoin and Ethereum.
The company was founded in 2012 by former Airbnb (ABNB) engineer Brian Armstrong and it is the largest cryptocurrency exchange in the U.S. and the third-largest exchange globally. The company has partnered with many leading tech companies, such as Dell Technologies, Inc. (DELL, Financial), Expedia Group Inc. (EXPE, Financial) and PayPal Holdings Inc. (PYPL, Financial) to incorporate and facilitate bitcoin payments. By positioning itself as a safe harbor among crypto-asset exchanges, Coinbase has grown in popularity over the last several years.
On April 14, the company went public by listing its equity securities on the Nasdaq exchange with a direct stock listing. Before its market debut, Coinbase also announced an increase in first-quarter revenue to $1.8 billion, which suggests the company is well and truly exceeding analyst expectations.
To add some perspective, Coinbase has brought in more revenue in the first quarter of this year than all of 2020. Many well-known Wall Street analysts have initiated coverage of the stock with a strong buy rating, but investors need to carefully evaluate the prospects for the company before jumping on board.
The business
Brian Armstrong, the company's founder, wrote in his first letter to shareholders, "Coinbase is a company with an ambitious vision: to create more economic freedom for every person and business."
This statement goes a long way in defining what the company is trying to achieve.
In over 100 countries, Coinbase has 56 million verified users, 7,000 institutions and 115,000 ecosystem partners. The company provides cryptocurrency trading and investing products for both retail and institutional clients. These products are tailored to address a wide variety of client needs as they transact in cryptocurrencies.
Coinbase Global operates few business lines, including Coinbase, GDAX, Custody and Toshi. The products aimed at retail traders include Coinbase App, which allows users to trade and store cryptocurrencies, Coinbase Pro, which is a platform that facilitates the trading of digital assets, and Coinbase Wallet, which allows users to access and store decentralized crypto assets. The products aimed at institutional traders include Coinbase Prime, a trading platform designed for high-net-worth individuals and institutional clients, and Coinbase Custody, which provides SEC-approved custodian services, third-party auditing and financial reporting validation.
Wall Street's take
The strong brand name of Coinbase, its existing customer base and the growth prospects for cryptocurrency and digital assets have led Wall Street analysts to assign sky-high valuation multiples for the company.
Gil Luria, head of institutional research at D.A. Davidson, wrote in a report:
"I expect that over time it's going to be one of the fastest-growing categories in technology and we think this is a great way to invest. Retail investors that are looking at investing in Coinbase need to understand the layers of risk to Coinbase's business. The reason we recommend Coinbase is we believe that the reward is potentially so high that it justifies that level of risk."
The analyst has assigned a target price of $650 per share for Coinbase, which implies the company is significantly undervalued in the market today at a price close to $315.
CFRA analyst Chris Kuiper wrote in a note to clients:
"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."
Kuiper has assigned Coinbase a target price of $400 in his base-case scenario, which suggests the company is modestly undervalued at present.
BTIG analysts set a target price of $500 per share for Coinbase as well and wrote:
"We believe COIN, the most popular consumer-facing cryptocurrency exchange in the U.S., is positioned to be a primary beneficiary of the increased adoption of Bitcoin and other digital assets as it continues to scale in the U.S. and internationally. The company has several avenues through which it could build upon its first-mover advantage as an on-ramp for mainstream crypto investors by diversifying its revenue stream away from transaction fees (96% of 2020 net revenues) and leveraging its increasingly robust platform for institutional investors, whose adoption of crypto represents a key driver of growth going forward."
ARK Investment Management, led by Cathie Wood, also invested $350 million in Coinbase, which can be thought of as an endorsement of the company's business model. Wood has been a revolutionary force on Wall Street of late because of her bold investments in young, high-growth companies such as Tesla Inc. (TSLA, Financial), which proved to be very successful yet controversial investments.
Outlook for cryptocurrency trading
Bitcoin prices continue to reach new highs, and the momentum remains strong because of multiple favorable macroeconomic developments such as the new-found interest in bitcoin among big tech companies and financial institutions. For instance, Visa Inc. (V, Financial), The Goldman Sachs Group Inc. (GS, Financial) and Morgan Stanley (MS, Financial) are all supporting the cryptocurrency industry by helping their clients gain access to bitcoin. In addition, the global payment giant PayPal recently enabled buying, selling and storing crypto assets in its wallets.
Digital currencies have piqued the attention of both retail and institutional investors in recent months as well because of their strong performance in 2020. Bitcoin was the best-performing asset class in 2020, boosting its recognition as an asset class that is likely to perform well during challenging economic conditions. Gold remains the most widely used hedge against stock market corrections, but cryptocurrencies are increasingly used by young investors for the same purpose.
Although it is difficult to predict which digital currencies will see significant price increases in the next decade, it would be fair to assume that cryptocurrencies are here to stay. According to a research report published by Facts and Factors Marketing Research, the global cryptocurrency trading industry will grow at a stellar compounded annual growth rate of 30% through 2026. If this projection materializes, Coinbase would be in a strong position to report triple-digit revenue and earnings growth because of the first-mover advantages enjoyed by the company in many markets. The transparency of blockchain technology, increasing adoption in developing countries, favorable monetary policy regulations and a substantial increase in venture capital investments will be the main growth drivers for the cryptocurrency industry.
Takeaway
Coinbase appears to be well positioned to translate the favorable industry outlook into higher profits. However, the company is already valued at over $43 billion in the market today, whereas it brought in just $322 million in profits last year. Because of the significant uncertainties regarding the future of bitcoin and other crypto assets, an investor should ideally allocate a very small portion of his portfolio to gain exposure to Coinbase. The reward, arguably, could be very high, but so are the risks associated with investing in Coinbase stock.
Despite an increase in the number of investors actively trading cryptocurrencies, CivicScience reports that only 9% of U.S. adults are interested in cryptocurrency trading for now. It would take years, if not decades, for bitcoin to become a truly mainstream asset class, which means investing in Coinbase is suitable only for investors with an extensive investment time horizon. The expected increase in competition needs to be considered before investing in Coinbase as well. Currently, the company charges high trading and brokerage fees, which will not be the case if competitors decide to cut down their charges to gain market share.
Coinbase presents growth investors with a good opportunity, but diversifying into unrelated business sectors while building a small stake in Coinbase seems to be the best option given how things could quickly go wrong. The risk-reward profile, however, is justifiable although the company is already richly valued in the market.
Disclosure: The author does not own any shares mentioned in this article.
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