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Case study: Coinbase IPO due diligence

What are investors looking at when considering an investment in Coinbase?

Coinbase released some impressive Q1 2021 numbers recently. Before deciding whether or not to invest, let's do some due diligence, diving into some of the risks, and make a case for why and why not.

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Coinbase Announces First Quarter 2021 Estimated Results and Full Year 2021 Outlook

Coinbase Global, Inc. (the “Company”) today issued estimated results for its first quarter ended March 31, 2021 and an outlook for the full year ending December 31, 2021. First Quarter 2021 Estimated Results* For the first quarter of 2021, the Company currently expects the following as of or for the three months ended March 31, 2021: Verified Users of 56 million Monthly Transacting Users (MTUs) of 6.1 million Assets on Platform of $223 billion, representing 11.3% crypto asset market share Includes $122 billion of Assets on Platform from Institutions Trading Volume of $335 billion Total Revenue of approximately $1.8 billion Net Income of approximately $730 million to $800 million Adjusted EBITDA of approximately $1.1 billion *This information is based on information available to the Company as of the date of this release and is subject to the completion of its quarterly financial closing procedures and review by the Company’s independent registered public accounting firm. Crypto price

https://investor.coinbase.com/news/news-details/2021/Coinbase-Announces-First-Quarter-2021-Estimated-Results-and-Full-Year-2021-Outlook/default.aspx

What are the risks?

Before making an investment, we need to consider what is risk and what are the different types of risks we need to consider with this investment.

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  • There is some uncertainty about how the company plans on using the cash they are generating in a meaningful way. As an investor, this has implications on how we expect the stock to perform. Should we be expecting to receive cash from dividends, high appreciation from growth, or perhaps both?

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  • Another risk to consider is regarding how long their current high growth rate can be maintained. What might future growth look like for their main business as market makers providing liquidity?

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  • The last risk we'll consider here is about that the future of Coinbase is dependent on the future of crypto because their revenue is tied to the transaction volume of cryptocurrencies.

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  • This will be difficult for investors to manage this risk; however there could be some interesting options strategies that might help.

 

The bull case

After considering the risks, what are some of the reasons to believe we should buy the stock:

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  • Coinbase just reported very strong profitability measures. While high revenue numbers are important, strong EBITDA margins and Net Income margins address the profitability of the company. The higher these margins, the more cash is being generated that can be given back to investors as dividends or reinvested in the company to increase growth. Revenue and EBITDA multiples are used to measure how well a company is doing and compare them to other companies.
  • Not only are they showing profitability, but they are also experiencing very high growth with Q1 2021 revenue being higher than all of 2020

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  • The high cash flows puts them in a good position to reinvest cash into lots of opportunities for growth through developments of additional products and services in the crypto space.

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  • Coinbase is much more profitable than other comparable marketplace companies like Airbnb.

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  • The initial valuations were before the Q1 numbers were released so investors will be trying to determine whether or not these numbers will continue to grow. The strong Q1 numbers make the initial $100-$120billion valuations seem reasonable.

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  • Coinbase diversifies the concentration risk from Bitcoin because other major cryptocurrencies, like Ethereum, don't have the same halving schedule so their prices are likely to be less correlated.
Coinbase Exchange Trade Volume, Trade Pairs, and Info | CoinGecko

Get Coinbase Exchange total trading volume, trading fees, pair list, fee structure, and other cryptocurrency exchange info. Find out the most actively traded coin on Coinbase Exchange.

https://www.coingecko.com/en/exchanges/coinbase_pro

 

The bear case

After considering the risks, what are some of the reasons to believe we should not buy the stock:

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  • There is an expectation of high volatility. Crypto investors tend to be willing to invest in companies with even higher multiples, sometimes to triple digits.

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  • Currently Coinbase has a relatively high take rate of 5%; however, that will likely drop as more competitors enter the market and in order to attract more institutional investors. This makes what they plan to do with that cash flow even more important to maintain their strong growth.

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  • Investing in Coinbase is indirectly investing in the trading volumes of crypto which is still dominated by bitcoin. Based on historical 4 year halving periods, we can expect trading volumes to be good in 2021 but start seeing declines in 2022 and drying up in 2023.
🌈 Bitcoin Rainbow Chart (Live) - Blockchaincenter

The Rainbow Chart is not investment advice! Past performance is not an indication of future results. The Rainbow Chart is meant to be be a fun way of looking at long term price movements, disregarding the daily volatility "noise". The color bands follow a logarithmic regression (introduced by Bitcoi

https://www.blockchaincenter.net/bitcoin-rainbow-chart/
By Nathan Gurr

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