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Coinbase gives retail users access to a comprehensive financial account for the crypto-economy, while offering large institutions a modern marketplace with adequate liquidity for safely trading crypto assets.
It also offers services that empower institutions to build crypto-based applications, and safely accept crypto assets as normal payment.
Coinbase IPOed back in April, with the stock performing poorly so far. Since the IPO, shares have slid from around $330 per share to around $230 at the moment. (See COIN stock charts on TipRanks)
This is likely attributed to investors, especially institutional ones, questioning the company’s long-term success in the context of future regulation. While Coinbase is certainly a speculative investment, I am bullish on the stock.
Regulatory Pushback
On September 20, Coinbase stated that it would not proceed with its Lend program, shortly after the Securities Exchange Commission warned to sue with a Wells notice.
A few days later, news came out that the company is working on a pitch to federal regulators on how to supervise the crypto industry. Even if Coinbase manages to convince regulators and proceeds with its Lend program, which could be a significant source of additional revenues, the picture is still foggy when it comes to such matters.
Only Half the Picture
Regardless of such concerns, there is strong reasoning behind a bullish case.
Firstly, we have to accept that the crypto-economy is here to stay. Coinbase is the leader when it comes to institutions safely purchasing crypto assets.
As the company revealed in its most recent shareholder letter, institutional volume comprised 69% of total trading volume in Q2, up from 64% in Q1. Clearly, institutions trust Coinbase, which by the way, is the only publicly traded company among its peers, providing its clients with that extra transparency they need.
Simultaneously, since Coinbase is the only publicly traded company in the space, it has access to cheaper financing versus its peers, further cementing its overall competitive advantage.
The company’s revenues and net income grew 1,042.1% and 4,918.8% year-over-year, respectively, to $2 billion and $1.6 billion.
Net margins are massive, since Coinbase operates a frictionless business model with no special operating costs. While revenues were boosted by increased volatility during the quarter, assuming no further growth ahead and utilizing the $1.6 billion net income on a run-rate basis (i.e., $6.4 billion/annum), the stock seems to be substantially undervalued.
At a market cap of only $48.6 billion, this amount implies a P/E of 7.6. That would be a ridiculously cheap multiple, even if the company were to not grow its net income in what is a rapidly growing crypto and NFT market.
The company, simply put, has a great competitive advantage in terms of future financing, trust development with its clients, and overall trading safety.
Wall Street’s Take
Turning to Wall Street, Coinbase has a Moderate Buy consensus rating, based on 12 Buys, three Holds, and one Sell assigned in the past three months. At $351.50, the average COIN price target implies 53.3% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Coinbase through stock ownership.
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