Coinbase Global (NYSE:COIN) went public earlier this month on April 19 and also released its first quarter earnings on April 6, 2021. Based on this release, COIN stock has not done very well. It is down from the opening trades on April 19 and closed on April 23 at $291.60. My view is that the stock is worth at least $370.89, or 27% higher than last close.
The reason I believe this is simple. The company projected $1.8 billion in revenue for Q1 2021. It also provided a range of estimates of the total number of clients in 2021. For example, Coinbase said there were three scenarios for its Monthly Transacting Units (MTUs) – i.e., its clients buying cryptocurrencies.
Forecasting Revenue and Valuation
The company expects to see 6.1 million MTUs in Q1 2021. But the first scenario it projects for 2021 in total suggests there would be only 4.0 million MTUs or 35% below the level in Q1. The second scenario is an average of 5.5 million MTUs during 2021 or 9.8% below Q1 estimates of 6.1 million. The last is for 7.0 million MTUs, or 14.475% higher.
We can use probability analysis to help us forecast the expected return. Let’s assume that there is a much lower probability that the first scenario occurs, and a much higher one that the third one happens. In other words, in scenario one there is a 10% chance that revenue falls 35%. This leads to an expected growth rate of -3.5% (i.e., .10 x -.35 = -.035).
Then let say there is a higher 30% chance that Scenario 2 occurs. The expected revenue growth rate is -2.94% (i.e., .30 x -.098 = -.0294).
Lastly, there is a 60% chance (i.e., 1 – .30 – .10) chance that revenue rises 14.475%. Therefore the expected revenue growth rate is 8.685% (i.e., .60 x + .14475 = .08685).
Therefore, adding up all three scenarios results in an expected growth rate of 2.245%, or about two and one quarter percent.
Let’s apply that to the situation. Using the $1.8 billion forecast Q1 sales, the run rate will be $1.8 billion x 4 x 1.02245. That results in annual run rate revenue of $7.362 billion.
Lastly, at 10 revenue, the estimated valuation would be $73.62 billion. This is 27% above today’s market value of $58.09 billion.
In other words, the expected target price is $370.89, or 27% over Friday’s price of $291.60.
What Analyst Say About COIN Stock
Some analysts have come out with their recommendations on COIN stock already. For example, Rosenblatt analyst Sean Horgan says that the stock is worth $450. He came out with a Buy recommendation on the Coinbase Global indicating it will benefit “from the growing adoption and acceptance of cryptocurrency.”
In addition, much has been made of Cathie Wood (CIO of Ark Investment Management) and her purchases of Coinbase Global since the company has gone public. The Motley Fool now says that the company’s clients own $580 million worth of shares, or 1.9 million shares of the company. It pointed out that she has been a “longtime believer in cryptocurrency,” which is still in its infancy.
However, the Fool points out that this still amounts to less than 1% of its total assets under management. However, 1.9 million shares represents just under 1% of the company’s 196.76 million shares outstanding, based on page 202 of the company’s latest 10-K filing.
Moreover, I am not the only analyst who believes in the stock. TipRanks indicates that 6 analysts have written up the stock. Their average price target is $479.83, or 65% above Friday’s price. Similarly, Seeking Alpha indicates that six analysts have a price target of $456.50, or 56.6% higher.
What To Do With COIN Stock
These analysts could be using a higher price-to-sales multiple than 10 times as I am using. Or they may have an elaborate price-to-EBITDA (earnings before interest, taxes, depreciation and amortization) model.
My model is as simple as I can make it, so that it can be easily understood. Using probability analysis based on the company’s own forecasts seems pretty simple. And using a 10 times price-to-sales multiple is also very conservative.
However, Seeking Alpha shows that the average analyst estimate for earnings puts COIN stock on a forward price-to-earnings of 47.2 times for 2021. And for 2022, the multiple rises to 81.45, assuming earnings per share (EPS) actually falls.
Therefore, as these ratios are very high and declining, keep in mind there is a general downward bias for its earnings growth. Until these estimates change and move to an upward trajectory, there could be continued downward pressure on COIN stock.
Nevertheless, I feel confident that the stock’s long-term value is still 27% higher than last close at $370.89 per share.
On the date of publication, Mark R. Hake held a long position in Coinbase Global (COIN).
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
