Opinion: Coinbase’s $100 billion valuation appears ‘astronomical’

A fair level of the bitcoin exchange Coinbase’s market capitalization after its Nasdaq listing can be estimated at $18.9 billion, not $100 billion as the market believes. This view was voiced by David Trainer, CEO of New Constructs, according to Decrypt.

On 6 April Coinbase presented its financial results for the first quarter of 2021. According to the report, revenue amounted to $1.8 billion, and net income was $730–$800 million.

In 2020 the bitcoin exchange obtained $1.1 billion in fees from trading activity of $193 billion. The final figure accounted for 86% of the firm’s total revenue.

Many observers regarded the best quarter in the company’s history as confirmation of an expected valuation above $100 billion after direct listing, scheduled for April 14.

According to Trainer, a key point in the bitcoin exchange S-1 filing was the assertion of the potential for the “cryptocurrency market to achieve the same penetration as the Internet.”

The CEO of New Constructs cited a CivicScience report which states that two-thirds of Americans are not interested in digital currencies, and almost one in five “never heard of them.” Trainer noted that, as competition intensifies, Coinbase’s profitability “could fall by 98%.”

The expert forecast that Gemini, Bitstamp, Kraken and Binance will offer lower or zero trading fees. The cryptocurrency market could repeat the fate of brokers in the traditional financial market in 2019. A catalyst could be the offering of such services by traditional brokers if Coinbase’s expectations of “following the Internet’s path” come to fruition.

Trainer estimated Coinbase’s trading-fee volume at $35 million in Q1 under a hypothetical scenario with fees reduced to 0.01%. In January–March, the weighted average of the metric stood at 0.57%. In this scenario, the bitcoin exchange valuation based on the reverse DCF model should be not $100 billion, but about $18.9 billion, 81% below current levels.

New Constructs emphasised that to sustain a $100 billion capitalization Coinbase would need to sustain after-tax operating profitability (NOPAT) at about 25%. Revenue would need to grow on average by 50% over the next seven years. In this scenario, Coinbase’s revenue by 2027 would be $21.3 billion, which would be 1.5 times Nasdaq and ICE’s combined revenue in 2020.

Coinbase is expected to have a direct listing of its Class A shares on 14 April. They will trade on Nasdaq under the ticker COIN.

Ahead of the historic event, Coinbase hired former senior SEC official Brett Redfern and former Morgan Stanley investment-banking executive Ian Runyan.

Earlier, Messari analysts valued Coinbase $28 billion.

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