Coinbase Gets A Big Upgrade as the Price of Bitcoin and Ethereum Jumps

Alex Cho

Alex Cho

CEO l Research Director

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Jason Chen

Jason Chen

COO l Research Editor

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Shakeel Stewart

Shakeel Stewart

Columnist and Author

Coinbase (COIN) finally catches a bit of a break this week, with analysts releasing estimates on the stock, and for the most part, the figures are a bit surprising as Moshe Katri from Wedbush Securities mentions in a report that the stock should be valued at $275 at 22.7x forward earnings, which seems fairly conservative for a growth multiple, but that’s mainly because the stock’s trading on thin ice with cryptocurrency volatility adding some subjectivity to the strength of business results.

Moshe Katri from Wedbush Securities discusses transaction fee volume:

COIN currently generates the lion share of its revenue from Transaction revenue, which is predominantly driven from fees. Coinbase charges a spread of 0.50% for cryptocurrency purchases and cryptocurrency sales as well as a Coinbase Fee, which is the greater of (a) a flat fee or (b) a variable percentage fee determined by region, product feature, and payment type. If the total transaction amount is less than or equal to $10, the fee is $0.99; if it is more than $10 but less than or equal to $25, the fee is $1.49; if it is $+25 but less than or equal to $50, the fee is $1.99; if it is +$50 but less than or equal to $200, the fee is $2.99. For example, if a $100 bitcoin purchase is made in the US with a US bank account or USD Wallet, the flat fee would be calculated as $2.99. The variable percentage would be 1.49% of the total transaction, or $1.49. Since the flat fee is greater, the fee would be $2.99. 

Due to this fee structure there is a greater significance on the volume of rather than price. If trading volume can maintain high levels despite price volatility, COIN will continue to report expansive volume/revenue growth. Custodial fee revenue is directly correlated to the price of crypto assets and will see a decline in the face of lower asset prices, but only 1.6% of net  revenue came from custodial fees in CY’20. 

Our Take on the Situation: While Moshe Katri does have a pretty good point, we do discuss the impact of volume of assets, where we state in a prior report titled: Coinbase Bombs Lower On Ehereum’s Worst Single Day Since 2017,

“Given the price of Bitcoin and Ethereum were $59,491 and $1,932 on March 31st, 2021 (the date when exchange assets were valued) we think the recent rout in Bitcoin and Ethereum translates to a loss on Assets on Platform from when prior-quarter, which will be difficult to ignore when Coinbase reports Q2’21 earnings. At this point, Bitcoin is priced at $36,371 and Ethereum is priced at $2,304 as of the time of writing. So, if the value of those assets were adjusted than BTC prices alone would affect coinbase assets by -$53.92B. That being said, we still think Coinbase’s total asset figure will drop to $150B – $170B or so assuming Ethereum continues to crater, along with the rest of the alts along with Bitcoin.” 

We still think the drop in assets will translate to less net transaction volume as the value of assets drop and cryptocurrency markets go through a protracted lull in the market.  Cryptocurrency markets are currently an $1.8T market currently, and Coinbase’s respective share of assets held in custody is a significant enough of a percentage at roughly 10% of total crypto assets held on an exchange. Then one would consider that yes, the volume of transactions will increase, but because Coinbase charges a percentage spread of 0.50% that if the overall market shrinks, then obviously the size of these transactions as a percentage spread of total gross market volume will also shrink as well. Sure, for smaller transactions the flat fee spread helps, but most people don’t leverage bitcoin for the purposes of spending money on a daily basis, that’s more for an Amex credit card, or conventional VISA debit card.

Value of assets will still affect exchange volumes given enough time

What we really think is likely to happen is that the bitcoin and ethereum market will be in an extended sell-off, and that periods of selling tend to happen for 6-month periods at a time, and that if the notional value of transactions start to drop, because the value of assets drop, then over time it will still affect Coinbase, though the causal link will come over a period of time delay, as bigger account holders pull out of bitcoin and transact less frequently, and smaller account holders likely churn out at a faster rate, as they attempt to buy bitcoin at a discount.

That being said, we generally view the report from Moshe Katri positively, because the near-term price optics primarily stem from the price of Bitcoin and Ethereum. We do believe in business fundamentals as well, and that the long-term trajectory of Coinbase is still positive due to long-term growth of accounts, and the simplified onboarding process that Coinbase does provide to beginning cryptocurrency investors. 

However, we also believe that these retail and institutional accounts will prove to be a more fickle bunch, and the sudden drop-off in value of assets, and also a surprise in asset withdrawals, akin to a run on a bank, paired with exchange dynamics would eventually translate to less platform activity and thus the positive fee impact from the sudden dislocation of assets will lead to a temporary uplift of revenue & financial results, but if prices continue to trend lower then eventually the amount of aggregated volume will drop in total value, and in turn the amount of fee revenue when measured against aggregated value of traded assets on exchanges will eventually trail off. 

This then hinges on whether or not Bitcoin and Ethereum then sounds marketable to the next wave of adopters in the midst of a sell-off and general negative bias in coverage from the financial media, which is likely to persist. We anticipate that the cool off period for BTC and ETH will affect financial results, which is why we find Moshe Katri’s financial estimates from Wedbush Securities particularly interesting for the upcoming FY’21 and FY’22.

Wedbush Analys Moshe Katri Discusses Growth Metrics and Revenue Drivers

Moshe Katri goes onto mention strong revenue growth in his report:

Transaction Revenue was $1.54B, up 796% YOY. Retail and Institutional made up 94.5% and 5.5% of total transaction revenue, respectively. Subscription and Services revenue was $56.4M up 694% YOY. Custodial Fees, Staking, Earn Campaign, Interest Income, and Other made up 41.6%, 18.3%, 19.7%, 5.9% and 14.5% of total subscription and services revenue, respectively.

Volume Metrics verified users was 56MM, up 64.7% YOY 34MM in 1Q20); Monthly Transacting Users (MTUs) was 6.1MM, up 369% YOY (1.3MM in 1Q20); Trading Volume was $335B, up 1,017% YOY ($30B 1Q20); Assets on Platform was $223B up 1,211% YOY) ($17B 1Q20); Trading Volume by type: Retail and Institutional was $120B and $215B, up 900% and 1094%; Bitcoin, Ethereum and Other Crypto Assets made up 39%, 21% and 40% respectively; Assets on Platform by type: Retail and Institutional was $101B and $122B, up 1933% and 1094%; Bitcoin, Ethereum, Other Crypto Assets and fiat made up 62%, 14%, 21%, and 3%.

Moshe Katri forecasts FY’21 revenue of 6.98B +446% y/y growth, FY’22 revenue of $8.348B +19.6% y/y growth, FY’23 revenue of $10.03B +20.3% y/y growth. The analyst goes on to estimate FY’21 Dil. EPS of $10.02 +539% y/y growth, FY’22 Dil. EPS of $12.10 +20.8% y/y growth, FY’23 Dil. EPS of $14.35 +18.6% y/y growth. 

Estimates could prove aggressive if Bitcoin and Ethereum Keep Crashing

We think, estimates for FY’21 are aggressive among analysts due to the management outlook. Generally speaking, there’s a pretty high correlation between value of assets and transaction volume assuming crypto markets enter into a bear market. So, the near-term impact on volumes may limit revenue growth below analyst estimates this year. However, we still think the long-term estimates embedded in analyst models seem conservative with very realistic growth targets that don’t match the parabolic nature of organic growth among the number of wallets, and bitcoin exchange account holders globally, so we think there are very long legs for growth, but the stock might struggle with reaching Moshe Katri’s $275 Price Target, especially if Bitcoin and Ethereum continue to drop lower. 

We still think there’s a high likelihood of this given how protracted the selling is, and the waves of selling that tend to happen in a crypto currency market crash. We discuss more of this in a report we published titled: Ethereum Recovered 50% in 24 Hours Due to Short Squeeze

Sure, the price of Coinbase went up today to $233.40 (+3.83% on the session), but that was mostly because the value of Bitcoin and Ethereum increased from the lows of the Wednesday session, and so the price of Coinbase is still correlated with the value of crypto assets, even if business fundamentals provide somewhat of a moat given the nature of revenue/earnings from an exchange/fee based model. 

We just don’t think investors will respond favorably when the eventual drop-off in total aggregated volume starts to affect the percentage spread earned on lower block transaction volumes, which will in turn nosedive business fundamentals given enough time, and will put more selling pressure on the stock until the underlying cryptocurrency market recovers. Though, the fundamental justification for strong revenue/earnings over a long time frame makes it a long-term buy and hold, simply finding a reasonable spot to buy the stock after the psychological lows of a deflated crypto market will be difficult for anyone looking to gain exposure to the space for the time being.

Disclosure: Cho Research was not compensated by Coinbase to publish “Coinbase Gets A Big Upgrade as the Price of Bitcoin and Ethereum Jumps” Though Cho Research does use the research dollars it
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