Weekly Valuation – Valutico | 15 July 2022
Link to the detailed valuation
Just over a year after its IPO via direct listing in April 2021, Coinbase shares have already received their first sell recommendation from an analyst. This is on the back of an 85% decline in its share price since its all-time high of $368 in November 2021. As the global economy has shifted to a risk-off approach in light of inflationary and supply chain pressures, crypto and crypto-related stocks have suffered the most. In addition to the macro events, the crypto exchange operator’s business could face declining revenues due to building pressure on fee income. Coinbase earns the bulk of its revenue from trading fees that retail investors must pay when buying crypto through the popular trading platform.
Fee revenues can readily and quickly fall victim to competitive pressures – unless they are protected by a structural barrier to entry. The company’s revenue pressures are expected to increase over time. The fact that U.S. discount broker Robinhood is currently explicitly advertising fee-free crypto trading on its platform is already indicative of what could loom in the near future.
For this reason, analysts rate the risk profile of the crypto company as unattractive and issue “Underperform” ratings for the stock. Although a concrete price target has not yet been given, the news agency Bloomberg quotes a fair value of $95 from its study – the current price is just under $53.
A broader foundation is needed
Furthermore, the large dependency on retail banking is also seen as critical. However, there are positive prospects due to the high level of awareness – not least due to the IPO. This could enable Coinbase to score points with institutional investors as well. Moreover, additional offerings such as custody and trustee services as well as consulting and research can diversify the business model. The acquisition of the data platform Skew is already heading in such a direction.
Coinbase has recently benefited from the rally on the crypto market, but the competition is not sleeping. Now it’s up to CEO Brian Armstrong to reduce the company’s dependence on retail fee income. If that doesn’t succeed, the skeptics could end up being proven right. Accordingly, the stock remains a watchlist candidate for the time being after its share price massacre since the IPO.
In our discounted cash flow calculation (Cost of Equity of 8.4% sith WACC of 7%) we have arrived at a valuation of $10.9 billion, with the sensitivity analysis delivering a range of $9 billion to $13.9 billion. In our market approach, we compared Coinbase with companies such as Block, Inc., CME Group Inc. and Robinhood Markets, Inc.. These confirm the concluded valuation range around the current market cap of $12 billion.
We therefore conclude that the company is fairly valued.