Afterpay: An interactive valuation
Introduction
Over the past 5 years, cryptocurrencies have risen from niche concept to household name.Coinbase (NASDAQ:COIN) is capitalising on this phenomenon. COIN is the largest crypto exchange in the US with roughly 10% of all crypto in the world held on the Coinbase platform.
The company competes in the regulated spot trading markets predominantly in the US as well as Europe. COIN recognises revenue from three different sources: retail trading, institutional trading and subscription/services.
We've put together an interactive valuation that will help you value COIN yourself by allowing you to decide on the inputs.
The outputs above summarise COIN’s current share price and market cap. This will stick to the top of your screen as you scroll further down the page. As you 'interact' with the inputs, the valuation will update in response.
Predicting COIN's Revenue
By far the most important part of COIN’s business model is retail trading. Approximately 90% of revenue stems from retail trading and on average, a 1.5% commission is charged to the value of every trade. The value of a trade equates to the quantity traded multiplied by the price of the asset. As a result, COIN’s revenue is tied to volatile crypto asset prices and modelling revenue can be difficult.Analysts predict COIN to generate roughly US$7.2b in revenue for 2022. We’ve taken that as our base input, but we’ll let you decide for yourself. As you adjust the revenue slider, your valuation will change accordingly.
Enterprise Value to Sales Valuation
Enterprise Value to Sales is the ratio of market value of a company's shares minus its cash plus its debt over its revenue. It’s used a measure of how expensive a company is compared to the revenue it generates. If the company is viewed as a fast grower by the market, the multiple will generally be higher.At its core, COIN is an exchange. Therefore, we have decided to compare it other exchanges Market Axxes (NASDAQ:MKTX), CME (NASDAQ:CME), NASDAQ (NASDAQ:NDAQ) and Intercontinetal Exchange (NYSE:ICE).
We've put together an interactive valuation that compares COIN to these peers, based on an 'Enterprise Value/Sales’ ratio. We think COIN can justify an Enterprise Value/Sales ratio at 1-2x its current ratio in line with ICE and CME.
At the time this article was published, COIN last traded at US$204.7 per share. Based on your inputs for Enterprise Value/Sales ratio and revenue, COIN should trade at
Should COIN Trade in line with peers?
COIN is an effective ‘picks and shovels’ approach to the cryptocurrency market, compared to holding crypto itself. The company is well positioned with a dominant market share in the US market, with their nearest rival, Kraken, being a third of their size.The benefits that come from scale are huge. As growth in users leads to higher transaction volumes and liquidity, better pricing is achieved. Higher transaction volumes will attract new projects to launch their tokens on the platfrom first. These factors work in tandem to create a network effect, allowing COIN to take market share from smaller players.
As well as being a crypto exchange, COIN is looking to grow by adding services to capture a larger piece of the crypto economy. The company is launching an NFT marketplace in partnership with Mastercard where 'digital art' can be bought and sold, and in doing so it's positioning as an all-in-one platform.
However, there are several ways COIN could not realise the value of its peers. These include:
• Regulatory crackdowns or outright ban of cryptocurrency stifling demand
• Rising competition resulting in commission rate pressure
• Decreased uptake of cryptocurrencies meaning prices experience a sustained period of deflation. COIN’s revenue is highly dependent on this factor and would significantly affect its ability to stay in business.
Summary
At the time of writing this article, COIN’s valuation was $44.1bn or $204.7 per share. You arrived at a valuation ofMethodology:
The valuation of Coinbase Global Inc was derived using a peer based valuation methodology, based on enterprise value ratios for the selected peer group. All data is sourced from public market annoucements. Some data may be sourced from third party data aggregators. The information provided on this site is general in nature, not financial product advice. Your personal objectives, financial situation or needs have not been taken into consideration.
All enquiries to mharper@moderninvestor.com.au.
