Summary Coinbase is by far the largest crypto exchange in the U.S., which makes it uniquely positioned to benefit from the secular shift to crypto. The company's financial performance is heavily influenced by the volatility of Bitcoin's price, but it is succeeding in building a more stable business based on subscriptions. The stock is currently trading at a 40% premium, suggesting limited upside potential. It is recommended to hold off on buying at this price. My thesis Everyone speaks about artificial intelligence ((AI)), and it seems that all other big secular shifts are undeservedly ignored. The crypto revolution is one of such trends and Coinbase ( COIN ) is one of the most important companies within the shift. There are several reasons to believe that COIN is one of the companies with strong potential to grow. The company is one of pioneers in the crypto industry and is the undisputed leading platform to trade crypto assets. The footprint in the U.S. is already massive. Having a strong positioning in a very competitive market gives optimism about COIN's potential to successfully expand internationally. Unfortunately, according to my intrinsic value calculation, the stock trades with a 40% premium. This means that big optimism is already priced in, and further upside is quite unlikely from this share price. On the other hand, the company's financial performance significantly depends on swings in the Bitcoin price. Bitcoin's price movements are quite unpredictable, which means that my intrinsic value calculation is based on assumptions with an extreme level of uncertainty around them. To conclude, I think that there will be better opportunities to initiate position in COIN and it is a Hold at the moment. COIN stock analysis Coinbase Global is the largest cryptocurrency exchange in the U.S. and one of the largest in the world. Apart from transaction revenue, COIN also generates sales from subscription and services revenue. 10-K Transaction revenue has been extremely volatile over the last three years, and it was multiple times lower in 2023 compared to 2021. This is explained by the nature of cryptocurrencies. Due to their inherent volatility, cryptocurrencies are mostly speculative assets. That said, when the Bitcoin ( BTC-USD ) price fell sharply in 2022, it has led to significant shrinkage in the trading volume, which has not recovered yet. The big crypto selloff in 2022 also affected sentiment in 2023, which also adversely impacted the trading volume. 10-K Profitability also significantly depends on the trading volume. However, the management did well in fortifying the company's business mix in recent years. Subscription and Services revenue almost tripled between 2021 and 2023 even despite considering the aftermath of the selloff happened in 2022. Boosting subscription revenue is a solid catalyst because this revenue is likely less vulnerable to sharp swifts in BTC and other coins' prices. Subscription revenue has several sub-streams in it, outlined below in more detail. 10-K As a result of the BTC-USD price recovery in 2023 and rapid expansion of COIN's subscription revenue, the stock rallied massively over the last twelve months. However, it is still cheaper compared to 2021 highs. In the below chart it is clearly seen that COIN has an almost perfect correlation with the price of Bitcoin. Data by YCharts Price of cryptocurrencies are driven by the supply-demand equilibrium. As the world's largest cryptocurrency, Bitcoin sets the tone for all other coins. Therefore, let us look at how the Bitcoin's supply-demand equilibrium might look like in future. Let me start with the supply side. According to nerdwallet.com , Bitcoin has released about 19.6 million of the 21 million total coins its source code will ever make available. That means that around 93% of the total supply capacity is already reached. However, due to the halving phenomenon, the maximum supply of 21 million will be reached only around the year 2140. Therefore, Bitcoin's supply is very unlikely to change significantly in foreseeable future and the demand will be the major driver of the BTC-USD price. Since BTC is mostly a speculative asset, the demand for it depends on the risk appetite of crypto traders. The cheaper money is (that is, the lower interest rates are), usually the higher the risk trades are willing to take. That is, since the Fed is expected to start cutting rates this year, the demand from crypto trading will likely grow. To support this statement, from the below chart it is evident that BTC started rallying massively in 2023 once the Fed stopped increasing interest rates. Data by YCharts From a more fundamental, not speculative, perspective it is important to pay attention to the penetration of crypto assets in our everyday lives. According to Statista, crypto user penetration is expected to grow steadily from 10.8% in 2024 to 12.4% in 2028. This might seem slow, but from headlines we see that BTC adoption expands notably. Some countries, as El Salvador, already adopted BTC as an official currency . Starting from December 2023, Swiss city Lugano accepts Bitcoin for all city invoices. In April 2024 , one of the largest digital payments processing companies in the world, Stripe, announced that it is bringing back crypto as a way to accept payments. That said, the limited BTC supply and growing demand for cryptocurrencies will likely lead to growing Bitcoin price, which will bring more trading volume to the Coinbase platform. Moreover, as crypto penetrates deeper into everyday transactions, the more sustainable growth in demand for crypto assets will be likely achieved. Coinbase will likely benefit from this favorable secular trend because the company's position in the U.S. crypto industry is unparalleled. It commands a 76% market share in the crypto exchanges market, meaning that it dominates the industry. The competition might come from Chinese players like Binance, but I think that probability is low. Binance has a controversial reputation in the U.S. as it was investigated by SEC , and its CEO and founder was even sentenced to four months in California prison on money-laundering violations. Intrinsic value calculation Discounted cash flow ((DCF)) approach rarely lets me down. Apart from it, the DCF appears to be the only reliable approach as the company is unlikely to start paying dividends anytime soon, which makes valuation under dividend-related models impossible. Moreover, running a peer valuation ratios analysis also does not look reliable because there is no other public U.S. company like Coinbase. Therefore, the DCF is likely the only way out to determine COIN's intrinsic value. I must start with calculating COIN's weighted average cost of capital, or WACC. According to my working below, COIN's WACC is 16.9%. It is so high due to COIN's massive 2.73 beta. DT Invest With WACC figured out, I can proceed with selecting other assumptions. For the current fiscal year, estimates from Wall Street analysts is a reliable source, in my opinion. Thus, I expect a $5.63 billion revenue in Year 1. As we saw in previous years, the volume of crypto trading significantly depends on the stance of investors, which is directly affected by the Fed's monetary policy. Since the Fed is expected to cut rates twice this year, it is highly likely that interest rates can move much lower in 2025. The last time interest rates were low, in FY 2021, COIN generated $7.4 billion in revenue. Therefore, I expect this revenue level for the second year of my DCF model. It is extremely difficult to forecast for years beyond the next two years. Therefore, I will rely on industry CAGR long-term forecasts for Years 3-5. Statista forecasts an industry CAGR of 8.62%, and it looks safe to incorporate into the DCF model. From the profitability perspective, I use a TTM levered FCF margin for the year 1, which is 5.31% . For the years 2-5 I use FY 2021 level, which is 33.83%. Due to COIN's strong potential to become one of the most important crypto companies in the world, I use an ambitious 5% perpetual growth rate. DT Invest Unfortunately, COIN is substantially overvalued at the moment. I think that a 40% premium to the stock price is not deserved, even for a potential star like COIN. Therefore, I would not recommend buying at this price. What can go wrong with my thesis? Cryptocurrencies overall, and Bitcoin particularly, are highly unpredictable. It is impossible to calculate the intrinsic value of BTC, which makes it impossible to project a target price for it. Sometimes it goes against all forecasts. For example, as the Fed remained hawkish in 2023, it was reasonable to forecast BTC softness. Despite this factor, it rose by 155% in 2023 . Therefore, it means that my DCF model incorporates assumptions with a low level of confidence in them. If BTC delivers another 100% rally over the next few months, COIN's revenue can potentially move higher than FY2021 levels. Or, vice versa, it might suddenly drop by 73% like it did in 2018 when the monetary policy was not tight. Therefore, a 40% potential downside might be wrong and investors who will decide not to buy based on my analysis will potentially miss out on a solid rally. Summary There are several reasons to believe that Coinbase has a strong potential to become one of the most important companies in the crypto era. However, this optimism is already priced in, and a 40% premium suggests that the market expects exponential revenue growth and profitability expansion. I need a few more quarters to get more conviction, and I am giving COIN a Hold rating here.
