Editing Coinbase

We are launching coverage of Coinbase Global (COIN) with a Buy rating and a $306 price target for 36% upside. We believe COIN brings 1) leverage to an ecosystem that has seen strong growth driven by increasing adoption of digital currencies, 2) a leading consumer platform with strong customer acquisition trends as well as a robust and rapidly growing institutional business, 3) an attractive business model that thrives on elevated cryptocurrency volatility, and 4) significant opportunities to add additional features and capabilities. While we believe that the continued success or failure of cryptocurrencies as an asset class will inevitably determine COIN’s longer-term fate, we believe COIN represents a blue-chip way through which to invest in the development of the ecosystem, powered by 1) its careful approach to regulatory compliance and KYC/AML, 2) its crypto-native technology stack and deep talent pool, and 3) its role as an innovation hub for new crypto endeavors as a result of its status as critical industry infrastructure, and its venture arm. While we believe the core business today offers an attractive growth profile with the potential to drive high levels of profitability, we see significant white space for new

# The best way to gain exposure to the expansion of the crypto-native ecosystem: COIN’s goal is to be the primary financial account for consumers to access the crypto-native ecosystem. While the crypto-native ecosystem today is still nascent, we are watching 1) the adoption of stablecoin-based payments, 2) innovations in DeFi, or decentralized autonomous blockchain applications, and 3) the adoption of non-fungible tokens (NFTs) and the creation of markets for tokenized, real-world assets, as potential drivers of crypto-native ecosystem expansion in the near term. If meaningful parts of the economy can transition to blockchain and crypto-native technology over time, we see significant opportunity for COIN to benefit from its status as a critical element of the financial infrastructure for the ecosystem.

# User growth to drive strong growth in transaction revenues over time: COIN has grown its users at a 35% CAGR over the past 3 years, reaching 56mn in 1Q21. With ~90% of revenues coming from retail trading, in the near term we see continued strong growth in users driving solid organic growth for the business. While we expect growth to continue, over time we expect 1) retail commission pricing pressure (where we highlight COIN’s current pricing and a handful of potential catalysts for compression), and 2) crypto market conditions to heavily influence the trajectory of revenues over time. On this latter point, we believe investors are too focused on the impact of prices and less focused on the impact of volatility, which we believe is the bigger driver in the near term. We leverage historical regression analysis to build a factor model for COIN revenues to estimate what COIN’s three guidance scenarios imply for the top line in 2021 (we believe $4.6bn for the “low” scenario and $9.5bn for the “high” scenario). Lastly, we sensitize our 2023 transaction revenue forecasts for various price and volatility environments.

# Significant white space for additional products: While just 4% of COIN’s revenue now comes from non-trading activities, we believe subscription and services revenue has the potential to see outsized growth relative to the core run rate of the business as COIN rolls out additional ancillary services over time. We believe staking revenues are poised for particularly strong growth given 1) the recent addition of Cardano (ADA) to the platform (which roughly doubles the current TAM on COIN’s platform for staking revenues), and 2) the transition of Ethereum to proof-of-stake (ETH 2.0). We also see collateralized lending (similar to margin lending) as a significant opportunity, as we project a ~$75bn lending opportunity for the crypto industry. We also expect strong growth in custody revenues driven by strong growth in institutional AUM. Lastly, over a longer period of time, we see entering the NFT space as well as blockchain-based payments as additional areas of expansion.

# Expect a somewhat volatile margin trajectory: COIN’s cost base is largely fixed, with headcount-related expenses supporting its technology, customer services, and back office driving the majority of the expense base and directly variable transaction expenses comprising less than 15% of revenues. COIN management has said that over the course of various crypto pricing cycles they will scale their business to operate at roughly breakeven over time. That said, our model does not take an explicit view of crypto prices and holds crypto market cap stable over time, and we expect to take a mark to market approach as prices fluctuate. Given COIN’s high levels of profitability at current crypto prices, we model ~30-40% EBITDA margins over time. That said, on our current expense base, we see breakeven levels of profitability if prices were to fall roughly 50% from today’s level, although continued reinvestment in the business will likely put an upward bias on the breakeven levels over the longer term.

# Valuation: We value COIN using a EV/Sales approach given the high growth rates and volatile margin profile of the company. We look at a range of comps, including market structure-oriented companies such as MKTX, TW, CME, and ICE, high-growth consumer-facing online brokers, such as IBKR, as well as payment-oriented companies such as SQ and PYPL. Our 12 month price target is based on 13x EV/sales on 2023E net revenues, which is roughly in line with more market structure-oriented exchanges and implies a market cap of $81bn and a 12 month price target of $306, for 36% upside over the next 12 months. Over time, increasing acceptance of crypto as a means of exchange, if that were to occur, would imply higher valuation multiples more in line with higher-growth payment companies, in our view. Key downside risks include 1) lower crypto pricing / volatility, 2) lower commission rates, and 3) crypto regulation.

==Regulatory concerns and key risks to our price target and investment

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Cybersecurity / custody risk: Many management teams at traditional financial services

companies will cite cybersecurity incidents as the risk to the business that “keeps them

cybersecurity incident in which hackers gain access to the private keys of customer

crypto wallets can result in the permanent loss of customer funds. The immutability and

funds to be recovered when the private keys are lost. While the same cybersecurity

concerns that exist at traditional financial institutions, such as personally identifiable

information, account numbers, and confidential information also exist for crypto-native

companies, a cybersecurity event has the potential to be the digital equivalent of a bank

robber gaining access to the bank vault, with the ability to instantaneously transport

away the contents. The most high-profile instance of this happening was in the 2014

collapse of Mt Gox, the then-largest crypto trading platform, which became insolvent

after the loss of BTC 850k. This issue highlights the importance of a strong custody

solution that safeguards assets.

resulted in the loss of customer funds, and we believe the strength of their custody

offering represents a key advantage over time, particularly for institutional clients.

However, a hack or loss of customer funds wold likely lead to negative impacts on the

broader industry, resulting from a loss of confidence in the safety of crypto assets, and

also potentially leading to lower crypto prices overall, which would indirectly have

ramifications for COIN earnings.