With Bitcoin (CCC:BTC-USD) once again flirting with all-time highs, it’s evident this will be a red-hot week in cryptocurrencies as we approach the Coinbase (NASDAQ:COIN) IPO (initial public offering) on Wednesday. Analysts are predicting a market capitalization of anywhere from $19 billion to a whopping $230 billion for the cryptocurrency exchange platform.
Market researcher Delphi Digital said in part that COIN stock “could trade closer to 15-20 times forward sales, which would imply a roughly $172 billion-$230 billion total market value.” $100 billion seems to be the magic number for many analysts, though some say that expected valuation is too high.
Julie Chariell, senior analyst at Bloomberg Intelligence, is supportive of the $100 billion valuation. She says based on figures provided by the company, Coinbase made about $3 billion of revenue in 2020. Chariell went on to say:
“The top 12 fintech firms to go public in the last six months have had price-to-sales ratios of 36 times… Multiplying that by 2020 revenue gets you… easily over $100 billion in market cap.”
However, market researchers at New Construct say “the company has little-to-no-chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion.”
New Construct points out that a valuation of $100 billion implies Coinbase will make 1.5 times as much revenue as the Nasdaq and New York Stock Exchange combined. The report also emphasizes that cryptocurrencies have growing adoption, but are yet to become mainstream, and says other cryptocurrency exchanges are likely to offer low or zero-fee trading to compete with Coinbase. In a mature market, that “race to zero” could crush profitability by as much as 98%.
The “race to zero” mimics the death of stock trading commissions and is especially relevant given the company’s reliance on trading to drive profits. Motley Fool reports the company “generated 86% of its revenue last year from transaction fees” and benefited from a bullish cryptocurrency market. However, they point out that in times when cryptocurrencies slumped, so too did trading volumes.
Of course, it makes sense that the fortunes of an exchange are directly tied to the fortunes of the assets it is comprised of. And for investors looking to profit off of blockchain assets, the fact that “flows of buyers and sellers can be less correlated than many crypto prices” means Coinbase could be a more stable asset to invest in than say, a bitcoin trust.
Coinbase reported excellent first quarter earnings just last week. InvestorPlace’s Will Ashworth said today Coinbase will close trading on April 14 above $100 billion.
On the date of publication, Vivian Medithi did not have (either directly or indirectly) any positions in the securities mentioned in this article.