Coinbase Global (NASDAQ:COIN) has had a rough time since its direct listing in early April when it closed at $328.28. COIN stock shot up to as high as $429 per share, but closed Tuesday at $222.47. That represents a drop of 48% from its peak and down about 32% from its direct listing in April. But COIN stock is worth at least 12% more than today’s price
This also makes COIN very cheap, especially since the company produced stellar earnings for the first quarter on April 6.
I wrote about this in April, but it is worth looking at one particular profit metric: its huge adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). It made $1.1 billion in adjusted EBITDA on $1.8 billion in revenue. That represents a huge EBITDA margin of 61.1%. This is why I think COIN stock is worth more than its price today.
Why Coinbase Stock Has Dropped
Before looking at COIN stock, I want to address why has the stock fallen so much, especially given its huge profitability. It certainly doesn’t look like the next quarter or two will show significantly lower earnings. I believe that the reason is a misplaced concern about the crypto exchange’s competition. Analysts believe that its revenue, despite higher transaction volumes in the future, will fall due to lower fees.
For example, last quarter, the company produced $1.8 billion in revenue on $335 billion in trading volume. That means that its average fee was 0.537% or 53.7 basis points. But consider this. Robinhood and Webull, both popular online trading exchanges that allow limited crypto buying, charge zero fees. Moreover, by contrast, Binance U.S., for example, a major crypto exchange competitor, charges just 2 basis points to 10 basis points. So analysts assume that Coinbase will be forced to lower its transaction fees.
Well yes, and no. That will probably occur over time, but it may not happen anytime soon. One reason for that is that Coinbase has a huge market share and a reputation in the crypto trading arena.
Coinbase’s Estimated Market Share
There are no figures or databases that track this. But we can estimate Coinbase’s market share to get a sense of its scale. For example, blockchain.com has a set of charts showing average daily volume. Looking at the charts here appears to be about $6 billion per day in blockchain transactions. This works out to $2.184 trillion per year, as a rough estimate. So, if Coinbase does $335 billion in transactions per quarter as it did during Q1 ($1.46 trillion annually), it has a 69% market share (i.e., $1.46 trillion / $2.184 trillion).
The point is, Coinbase probably knows its market share in cryptos is huge. It probably don’t feel much pressure right now to lower fees. Yes, Binance has a lower fee structure, and so do the other online brokerages — but the latter don’t have offer many cryptos in which you can trade.
Granted, Bitcoin (CCC:BTC-USD) is probably the single largest traded crypto and all these brokerages allow trading in it. So that could also be a factor to keep in mind.
Where This Leaves COIN Stock
Analysts estimate Coinbase will make $6.41 billion in revenue this year, and that it will fall to $5.84 billion in 2022. By 2023, the estimate is $6.96 billion. However, let’s also give analysts some credence and estimate that its EBITDA margin will fall to 50% from 61%. That means that by 2023, its EBITDA will reach $3.48 billion.
Therefore, assuming the stock reaches a 15 times EBITDA multiple, its enterprise value (EV) will be $52.2 billion. Moreover, the company also has $1.439 billion in net cash that should be added back to the EV. That gives COIN stock a target market value of $53.639 billion. This is $12.1 billion higher than its present market value of $47.84 billion.
Therefore, Coinbase has a target price of at least $249.53 per share (i.e., 12.1% above its price at Tuesday’s close of $222.47). This assumes that analysts estimate that the company will lose market share and/or have to lower its transaction fees over the next several years. If it doesn’t have to, as I suspect might happen given its huge market share, COIN stock will be worth much more.
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On the date of publication, Mark R. Hake held a long position in Bitcoin but no other security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.