Coinbase: No Coins to Craft Here
First we put Coinbase (NASDAQ: CURRENCY) in the danger zone in March 2021 ahead of its IPO. Since then, the stock has fallen 56%, compared to a 5% gain for the S&P 500. Although the company set records for many of its chosen key performance indicators in 2021, sustained success seems unlikely. .
Coinbase stock could fall further depending on:
- tough comps in 2022 given record crypto trading in 2021
- increasing use of transaction fees despite the introduction of new products/services
- forecasts for 2022 imply a significant reduction in profitability and very little clarity on user growth
- the stock’s current valuation implies that Coinbase will be bigger than Charles Schwab (SCW) – no less, and the stock could be down 35% and more
Figure 1: 61% outperformance in the danger zone: 04/15/21 to 03/04/22
Record crypto trading: in 2021, the market capitalization of all cryptocurrencies reached $2.3 trillion, up from $782 billion at the end of 2020. Bitcoin and Ethereum hit record highs and led Coinbase in 2021:
- monthly transactional users (MTU) multiplied by 4 compared to 2020
- transaction volume up almost 9 times compared to 2020
- assets on platform multiplied by 3 compared to 2020
Controlled operating costs: often, as small businesses grow rapidly, they struggle to control their expenses, but not Coinbase. Coinbase’s 2021 results revealed that operating expenses as a percentage of revenue fell from 68% in 2020 to 61% in 2021, which helped boost the net operating profit after tax (NOPAT) margin. from 25% to 32% over the same period. However, such cost control will not continue into 2022, as we will detail below.
Othe hat does not work
Coinbase is increasingly reliant on transaction fees: In 2020, 86% of Coinbase’s revenue came from its transaction revenue. Despite the introduction of new products that generate service fees, Coinbase’s transaction revenue grew to 87% of revenue in 2021. As we noted in our previous reports, transaction-based revenue will be harder to come by. maintain in the future as competitors enter the market. and reduce transaction fees to zero. Unsurprisingly, the amount of money Coinbase collects per transaction has plummeted in 2021.
In 2021, Coinbase collected 0.41% of each transaction as revenue ($6.8 billion in transaction revenue out of $1.7 trillion in transaction volume). In 2020, Coinbase collected 0.57% of each transaction as revenue ($1.1 billion in transaction revenue out of $193 billion in transaction volume). We expect Coinbase to collect less and less revenue from each transaction as the market matures.
Growth in 2021 is not sustainable: The record performance of 2021, which was largely due to the rapid increase in crypto value and market capitalization, is not sustainable. Year-over-year (YoY) comps for Coinbase are likely to be lackluster in 2022. This expectation is not just ours, but management’s as well. In its 4Q21 earnings call, management indicated that it expects trading volume and retail MTU to be lower in 1Q22 compared to 4Q21.
Forecasts for the full year 2022 look even worse than just volume and lower MTUs than 1Q22. For example, Coinbase expects 2022 average transaction revenue per user (ATRPU) to be “before 2021” levels, which, while vague, certainly implies a decline. The 2021 ATRPU was a record $64, while the 2020 ATRPU was $45 and the 2019 ATRPU was $34.
On the user front, management notes that it is very uncertain how many users Coinbase will have in 2022. The company has guided between 5 and 15 million average retail MTUs, implying either a 40 % at the low end, a year-over-year increase of 79% at the high end. The midpoint would imply 19% year-over-year growth in average retail MTUs. Such a wide range suggests that management is not very confident in MTU growth.
Investors should also expect Coinbase’s profitability to nearly disappear in 2022. Using management’s forecast for operating expenses, including a more than doubling of technology and development expenses and general expenses and administrative, we see that Coinbase’s projected operating expenses for 2022 will reach 96% of 2022 revenue. (based on consensus estimate). Figure 2 illustrates Coinbase’s expected rapid increase in operating expenses, which will lead to lower profit margins.
Figure 2: Coinbase Operating Expenses: 2020-2022E
Coinbase is still rated to be the largest exchange in the world
Although COIN has fallen 56% since the opening price on the date of its IPO, the stock is still significantly overvalued. Below, we use our inverse discounted cash flow model to illustrate the high future cash flow expectations implied by Coinbase’s current valuation.
To justify its current price of $183/share, Coinbase must:
- maintain a NOPAT margin of 21% (equal to the Nasdaq [NDAQ] 2021 margin and despite the expected decline in 2022) and
- increase revenue by 15% per year through 2028 (vs. consensus estimate of 3% CAGR from 2021 to 2024)
In this scenario, Coinbase would earn $1 billion in revenue by 2028, which is 39% more than the combined revenues of Intercontinental Exchange and Nasdaq in 2021, 10% more than Charles Schwab’s revenue in 2021, and 42 % of TTM revenues of the 10 largest financial groups and commodity market operators.
If Coinbase kept trading revenue at 87% of revenue and fees at 0.41% of trading volume (as shown above), this scenario implies that trading volume on the Coinbase platform would be 4.4 trillion dollars in 2028, which would equate to 31% of total cryptocurrency transactions. volume in 2021. For reference, Coinbase’s trading volume was 12% of cryptocurrency trading volume in 2021.
35% + Disadvantage if the consensus is good
We look at an additional DCF scenario to highlight the downside risk should Coinbase profitability align with traditional exchanges and revenue grow at consensus rates.
If we assume that Coinbase:
- NOPAT margin drops to 21% (equal to Nasdaq 2021 margin),
- revenues grow at consensus rates in 2022, 2023 and 2024 (-4%, 17% and -3%), and
- revenues increase by 12% each year from 2025 to 2028, then
COIN is only worth $115/share today – a drop of 35%. If the expected drop in profitability for 2022 lasts longer than a year, or if the cryptocurrency sees a cap on trading volumes, the downside is even greater.
Figure 3 compares Coinbase’s implied future revenue in this scenario to its historical revenue as well as Charles Schwab’s 2021 revenue and the combined 2021 revenue of Intercontinental Exchange and Nasdaq.
Figure 3: Historical and Implied Coinbase Revenue: DCF Valuation Scenarios
Each of the above scenarios also assumes that Coinbase’s invested capital equals 10% of revenue each year. This growth in invested capital represents less than half of the change in invested capital as a percentage of revenue in 2020 and 2021. If we assume that Coinbase’s invested capital grows at a similar rate to 2020 and 2021, the downside risk is still most important.
This article originally published on March 7, 2022.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, industry, style, or topic.
 Companies in this group include Cboe Global Markets (CBOE), CME Group (CME), Deutsche Borse AG (OTCPK:DBOEF), Fidelity National Information Services (FIS), Interactive Brokers Group (IBKR), Intercontinental Exchange (ICE), MarketAxess Holdings (MKTX), Nasdaq, Inc. (NDAQ), Tradeweb Markets (TW) and Virtu Financial (VIRT).
 Consensus estimates based on twenty analyst estimates in 2022 and 2023 and eight analyst estimates in 2024.