Coinbase Analysis - $540 Price Target

Coinbase is building one of the best crypto ecosystems globally with its wallet, payroll, trading platform, education, NFT marketplace, and a place for developers to create decentralized applications. Its mission is to bring economic freedom to the world. Coinbase is one of the largest crypto exchanges in the world, with $1.671T in trading volume for 2021 (up from $193B in 2020) and $278B in assets on its platform (compared to $90B in 2020). Note that the overall crypto market grew 287% from 2020 to 2021, while Coinbase's AUM grew 308%. Coinbase has increased its monthly transacting users to 11.4M from 2.8M a year ago. Not only is their user base growing substantially, but the average user trading volume has gone up as well.

As you can see below, institutional trading has driven an 8.5x in trading volume compared to 2020. The "smart money" is now coming in and in a big way. This validates the crypto space and shows that it is here to stay. Coinbase offers a variety of coins on its platform, which has resulted in "Other crypto assets" beyond Bitcoin and Ethereum contributing to 55% of total Trading Volume in 2021.

Revenue

Coinbase generated $7.4B in revenue in 2021, a 544% increase. Subscription revenues grew to $517.5 million in 2021 from $45 million in 2020. Coinbase has added Coinbase Pro, a $29.99/mo subscription service that offers zero trading fees, $1M protection, and 24/7 support. Subscription revenue is sticky, so Coinbase's ability to continue to grow this number will be crucial as competition drives trading costs down to 0.

Coinbase generated over $500 million in Subscription revenues–including over $200 million in the fourth quarter – with traction in products including Staking, Earn, and Custody. The institutional customer base grew 50%.

Balance Sheet

Coinbase is in a great cash position to invest in long-term growth opportunities even if the crypto markets experience volatility to the downside. They ended 2021 with $7.1B in cash and cash equivalents with $3.4 billion in long-term debt.

Investments

NFT Marketplace / Web3 products

Crypto derivatives

Coinbase Prime

Coinbase Cloud

Build out of APIs to enable businesses of all kinds to leverage our platform.

Security, Legality, and compliance

Headcount

NFT Opportunity

Non-Fungible Tokens (NFTs) have exploded in popularity over the past 12 months. From Beeple's $69.3 million sale of Everdays to Bored Ape Yacht Club to Flyfish Club. NFTs began as digital artwork that can be traced to the creator and verified for authenticity. They can be held by the owner and sold on a marketplace. This is where Coinbase comes in with an NFT market for users to create, buy and sell NFTs. This trend is here to stay, and Coinbase is poised to capitalize on its broad range of crypto services.

5 Year Price Target: $540

It is hard to predict what the crypto market will look like a year from now, although I believe the space has a very high probability of growing to $10 Trillion by 2027 (more below), up from nearly $2 Trillion today. Removing the change in custodial funds to the cash flow statement, Coinbase had a free cash flow of $2.9B in 2021, up from $344M in 2020. They have proven to run an extremely profitable business and have the talent to continue to innovate their ecosystem to maintain market share leader. My base case assumes they slightly lose market share over the next 5 years (but continue to be the leader) with margins leveling out to roughly 22% in 2027, growing their FCF on average of 37.9% for the next 5 years and 7% for the following 10 years. I used a discount rate of 10% to get a 5-year target of $540, resulting in a 267% gain from the current price of $147.35.

Crypto Market at $10 Trillion in 2027?!

I know this may seem crazy, but I see an actual probability of this happening. Here's how I get there. Bitcoin's price is highly correlated to the number of people using bitcoin. Since we know the supply-side economics of bitcoin, we need to estimate the demand to forecast the price.

Jurrien Timmer from Fidelity investments put together an amazing chart plotting mobile phone subscriptions vs bitcoin addresses. He then adds a power regression trend line to project the future bitcoin demand. As you can see by the R2, mobile phone subscriptions have explained nearly 97% of the growth in bitcoin addresses, so extracting this into the future seems more than reasonable.

We get a price forecast below by projecting this demand curve into the future against bitcoins known supply-side economics.

This gives a price target of roughly $400k by 2027, or a 10x. That would value bitcoin at approximately $7.6 Trillion alone. There will undoubtedly be other crypto assets other than bitcoin, so I think a $10 Trillion crypto market in 2027 does not seem too crazy.

DISCLAIMER: I AM NOT A FINANCIAL ADVISOR, THIS IS NOT INVESTMENT ADVICE AND INTEDED FOR INFORMATIONAL PURPOSES ONLY. I OWN COINBASE STOCK IN MY PERSONAL PORTFOLIO. THIS IS IN NO WAY A RECOMMENDATION TO BUY, SELL, OR HOLD COINBASE. FORECASTED PERFORMANCE RESULTS ARE HYPOTHETICAL AND HIGHLY SPECULATIVE, AND PRESENT MANY RISKS AND LIMITATIONS. INVESTMENTS OR STRATEGIES MENTIONED ON THIS WEBSITE MAY NOT BE SUITABLE FOR YOU. THIS MATERIAL DOES NOT TAKE INTO ACCOUNT YOUR PARTICULAR INVESTMENT OBJECTIVES, FINANCIAL SITUATION OR NEEDS AND IS NOT INTENDED AS RECOMMENDATIONS APPROPRIATE FOR YOU.

Sources:

Coinbase Presentations

Fidelity

@TimmerFidelity