Coinbase makes a lot of money from fees. This is not a good thing.
Fees will drop and so will Coinbase's earnings
Coinbase made an absolute killing in the quarter leading up to its IPO. An absolute monster of a quarter.
The company pulled in $1.8bn in Q1 of 2021. To put this in context, they company did $1.3bn in the whole of 2020. If the run rate holds, $COIN will clear $7bn or more in financial year 2021.
Combing through the last trailing 12 month financials, gross profit is about 89%. The company could clear $6.23bn in gross profit. It is currently trading at a market cap of $63bn. Assuming revenue run rate is spot on, we’re looking at a forward gross profit multiple of 10.1x.
This is considered cheap for a company that quadrupled revenue. However, it is only cheap if the following holds :
Price of bitcoin holds or increases in the next 5 years.
Trade volume from retail & institutional investors holds or increases.
Coinbase continues charging the same ridiculous fees per trade for retail investors (1.49% , goes up to 3.99% if you use a debit card).
Coinbase holds onto its 11% share of the crypto exchange market and grows it.
A new way of buying and selling crypto does not emerge (decentralized exchanges for example)
I’m going to go out on a limb here and say that I am only certain of points 1 & 2. Point 3-5 is probably going to happen in the next 5-10 years.
Charging 1.5% (goes as low as 0.04% on trades in excess of $1bn : https://prime.coinbase.com/fees) is not tenable. Trading will eventually cost $0 and margins will drop dramatically as the market for crypto brokers matures. In the 1990s, equity trades cost this much. In 2021, not so much.
Will I be buying Coinbase? Probably not.
It all comes down to price. At a $63bn market cap, the stock is too richly priced for the long list of future downsides. There isn’t a defensible moat around coinbase’s crypto brokerage business.
I do see $COIN as a potential short term investment. As a large crypto exchange, it will likely be profitable until the market matures. When that will happen is anyone’s guess, but I think it will be sooner than later.
Binance & Gemini are 2 big competitors and fees will be the first area of competition. This is not a good thing for Coinbase.
Assuming Coinbase’s fees drops 10 fold and Bitcoin’s value increases 10 fold by 2030 the company’s revenue could remain the same in 2030. The market could then give is a small premium (say a 15x forward gross profit multiple), representing a possible 50% 10 year return. Not too shabby, but not worth my investment $$ today.
If I really want to ride this crypto gain, i’d rather buy BTC, ETH and some good altcoins as a 10 year investment.
**I am not a licensed investment guy and you shouldn’t take investment advice from this article. This is just opinion. I con’t own any crypto at the moment and am long on equities.