There’s nothing more illustrative of the wildness that is affecting the financial markets today than the huge expectation regarding coinbase’s Coinbase public offering scheduled for 14 April. The euphoria over the first major cryptocurrency player to go public is of a piece with the damn-the-fundamentals craze that’s spawned the [hotlink]Tesla[/hotlink] phenomenon and pushed U.S. equities to near-bubble territory. Wall Street analysts and Bitcoin-loving investors are predicting that Coinbase could launch with the $100 billion mark. The mathematical impossibility of Coinbase. In order to justify the figure, the math suggests, Coinbase would need to expand into the biggest trading platform in the world. “It’s one of many aspects of the global explosion of bubbles all over the world,” says David Trainer who is an analyst with Research firm New Constructs. “When you crunch the math, there’s no way to argue to own this stock an even stance.”
Trainer recently released an outstanding review of the prospects of Coinbase. It outlines how the new competition could slash today’s margins, and also argues that the market for crypto isn’t as massive as Coinbase expects, resulting in an investment worth only a less than what its users will pay on its the day of its debut.
The flush times won’t last forever
Coinbase became extremely profitable last year, nearly the revenue of 483 million dollars to $1.14 billion, and boosting its operating earnings from deficit of $45 million up to $409 million. The company’s registration statement states that Coinbase made 87% of these revenues by dealing and trading Bitcoin, Ethereum, and more than 50 other coins to both institutional and retail customers. It is surprising that corporate and money managers now represent more than 50% of the transactions it conducts and bolsters its claim that cryptocurrency is becoming mainstream in a major way. The operating return of 35% on sales was equal to the margin in 2020 that the Goldman Sachs Global Markets franchise in one of its most successful years.
What’s really triggered Coinbase excitement is the astonishing results of its March quarter that were released on the 6th of April. Revenues for the quarter jumped 11 times up to $1.8 billion, which is 58 percent more than what it earned in the entire year of 2020. Its operating earnings jumped to more than $1 billion, more than double the amount it earned the previous year. The operating margin of 55% is far higher than what the trading arms of Wall Street banks pocketed in the year that was a record-breaking 2020.
But here’s the true head-spinner: Coinbase generated 0.46% for every dollar it dealt in cryptocurrency, or nearly $300 per Bitcoin it purchased and sold to customers. It’s the impossible task of maintaining the same level of wealth margins for trading that show how Coinbase’s valuation is off-base in comparison to its actual potential.
Participate in the competition
In the S-1, Coinbase details that they charge customers an unrestricted fee, which is approximately 0.5 percent of the value in dollars of an Bitcoin or Ethereum trade. The fee can be less or more dependent on the volume of transactions–the more customers trade with Coinbase, the less the percentage will be–or the areas in which the customer is located. The company also earns less from the difference in between its “ask” at the price it purchases from customers and it’s “bid” at the price it sells. How does the Q1 average fee of 0.46% compare with the figures for the two largest owners of securities exchanges in America, Intercontinental Exchange (ICE), and [hotlink]Nasdaq[/hotlink] Inc.?
The year 2020 was the most successful. ICE along with Nasdaq each achieved on average 0.01 percent for every dollar of securities’ transactions. Therefore, Coinbase reaped about 50 times the margins offered by those huge, long-standing marketplaces. Coinbase generated 3 quarters of the Nasdaq’s trade revenues–$1.5 billion, versus $2.0 billion, which is based on 2percent of the volume.
It won’t last long, says Trainer. Trainer predicts that the fees for trading in cryptocurrency will follow the same downward path similar to those of stocks, perhaps until they reach zero. The share of transactions that Coinbase takes is so large and its profits are enormous, that rivals are able to cut costs and still make massive profits. “Competitors like Gemini, Bitstamp, Kraken, Binance, and others are likely to lower or even eliminate charges for trading to capture the market,” he says. “If margins are that high they will invite competition.” It will trigger an “race for the lowest” like the one for market share that led to the collapse, and later the virtually eradication, of commissions on stock in the year 2019. Trainer is also expecting traditional brokerages to provide trading on cryptocurrency and further pressure Coinbase’s high charges.
How fast will Coinbase become worth $110 billion?
Trainer did the calculations. In order for Coinbase to achieve its 100 billion in market value by 2027, the company’s revenues would have to grow by 50% per year, to $21.3 billion. Meanwhile, free cash flow continues to grow growing up to $3.2 billion, nearly 10 times what it was the previous year. The company would still be trading at a premium multiplier that is 30x cash flow. If the company is worth $20 billion, Coinbase would exceed the combined revenues for 2020 from ICE as well as Nasdaq by 50 percent.
Simply put, to achieve the size that would warrant the $100 billion market cap –and which is happening today–Coinbase will be the largest exchange worldwide. This is the wager investors are placing when they invest in its shares during the 14th of April and beyond.
Does Coinbase reach that point?
For Trainer, the prize seems like an impossible mathematical proposition. If the margins for operating expenses of Coinbase drop to the rate of 23% for the 18 biggest investment banks, which is huge–and revenues rise at a hefty 21%, the level which Nasdaq reached during its explosive growth phase Coinbase will be valued at $18.9 billion, which is more than 80 percent less than $100 billion that it is likely to earn this week.
Another alarming statistic: the margin of trading for Bitcoin drops from 0.46 percent to 0.10 percent. This is still 10 times more than what ICE and Nasdaq generate. In order to reach that $21.3 billion in revenues that sounds the alarm, according to Fortune’s estimates, Coinbase would need to trade $17 trillion annually with Bitcoin as well as other tokens. This is more than four times the volume of all cryptocurrency, on every exchange, until 2020.
To Coinbase Chief Executive Officer Brian Armstrong, a future where such staggering figures are achieved appears like a possibility, but not impossible. The S-1 declares that “crypto could be as innovative and widely used in the same way as internet. Internet.” Trainer is selling a growth-oriented story for an investment that’s not widely used. Trainer believes that Coinbase is the perfect example of an “meme stock” that is traded with no any consideration of the basics.” The concept is appealing so long as it stays high-minded and doesn’t get too specific about the feats required for it to become in the $100-billion range. Investors must remember that they’ll pay an exorbitant amount for an ambitious venture that’s not likely to succeed in reaching the summit.