This direct listing will be HUGE... one of the biggest. First, let's make it clear this is a great company that has opportunistically generated A LOT of profit . They were at the right time, and at the right place... twice. What they've done, without a doubt, is VERY impressive. But, is the stock worth buying right now?
Let's start with the fundamentals...
Coinbase has had an extremely successful 2020, with $1.14B in revenues (136% YoY). They've also netted $322M last year, and sitting on $1B of cash. This isn't a company needing to fund their growth with an IPO... or, a company that will be profitable at an unknown date in the distant future. This is a company that... well... the current owners are... sort of, cashing out... at(arguably) the top.
Coinbase is expected to be valued at $100B or greater (likely greater). When you put that into perspective against the NASDAQ and ICE (NYSE) valuations, you can see how preposterous that seems – see Chart below. Sure, they had a blowout first quarter of 2021 ($1.8B in Q1'21 revenues) – which I'm sure was beyond anyone's wildest expectations – but the numbers still don't add up for me.
Assuming Coinbase ends 2020 with $5B of revenues and a 30% net income margin, they're still valued at 3x their peers!
Sure, cryptocurrencies are the future and the market cap is still at its infancy, right? But, what about the volatility that we continue to experience? There's no doubt this volatility will present itself in the price of $COIN as well. I'm also afraid of yet another "crypto winter" because... well, how hot can this market really get?
Taking a look at the below, from John Street Capital on Twitter, you can clearly see the correlation of BTC & ETH prices with Coinbase revenues. This shouldn't be a surprise, but it really paints the picture. Is that the kind of volatility you're ready to take on in your portfolio?
Besides the volatility, the bigger fundamental risk I see is the upcoming competition. I'm talking about centralized vs. decentralized exchanges – what does the future really hold? If you're a true believer of this technology, and believe that widespread adoption will eventually take place, it's hard to argue that decentralized exchanges (DEXs) won't be the main players here. Without a doubt, there will also be more institutional competition in the centralized world as well.
The second fundamental risk (i.e. competition) can be mitigated by what Coinbase does to leverage its first-mover advantage. But, the first (i.e. volatility) is merely out of its control. In either case, with a valuation like this, I really hope this direct listing isn't a dump to the retail investor. Time will tell... but I'm staying on the sidelines for this one.
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