Latest revision |
Your text |
Line 1: |
Line 1: |
| {{Cover Image|[[File:Coinbase cover.png]]}}
| | 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 |
| | |
| {{Infobox company
| |
| | name = Coinbase Global, Inc.
| |
| | type = [[Public company]]
| |
| | traded_as = {{ubl|{{NASDAQ|COIN}}|[[Russell 1000]] component}}
| |
| | logo = Coinbase.svg
| |
| | founded = {{Start date and age|2012|06}} in [[San Francisco]], California, U.S.<ref name="jtimes" />
| |
| | location = [[Remote work|No physical offices]]{{efn|Legal address at [[Corporation Trust Center]]}}
| |
| | founders = {{ubl|[[Brian Armstrong (businessman)|Brian Armstrong]]|[[Fred Ehrsam]]}}
| |
| | industry = [[Cryptocurrency]]
| |
| | products = {{hlist|[[Bitcoin]]|[[Bitcoin Cash]]|[[Ethereum]]|[[Litecoin]]|[[Digital currency exchanger|exchange of digital assets]]}}
| |
| | area_served = 100+ countries
| |
| | key_people = {{ubl|Brian Armstrong|([[Chairman]] & [[Chief Executive Officer|CEO]])|Emilie Choi|(President & [[Chief operating officer|COO]])|Alesia Haas|([[Chief financial officer|CFO]])}}
| |
| | revenue = {{Decrease}} {{US$|3.19|link=yes}}{{nbsp}}billion (2022)
| |
| | operating_income = {{Decrease}} {{US$|-2.7}} billion (2022)
| |
| | net_income = {{Decrease}} {{US$|-2.6}} billion (2022)
| |
| | assets = {{Increase}} {{US$|89.7}} billion (2022)
| |
| | equity = {{Decrease}} {{US$|5.45}} billion (2022)
| |
| | num_employees = 4,510 (2022)
| |
| | owner = Brian Armstrong (19%)
| |
| | website = {{official website}}
| |
| | footnotes = {{notelist}}<ref name="10K">{{cite web |url=https://www.sec.gov/ix?doc=/Archives/edgar/data/1679788/000167978823000031/coin-20221231.htm |title=Coinbase Global, Inc. 2022 Form 10-K Annual Report |publisher=[[U.S. Securities and Exchange Commission]] |date=February 21, 2022 }}</ref><ref name="DEF14A">{{cite web |url=https://www.sec.gov/Archives/edgar/data/1679788/000114036122015201/edge20001234x1_def14a.htm |title=Coinbase Global, Inc. 2022 Proxy Statement (Schedule 14A) |date=April 20, 2022 |publisher=[[U.S. Securities and Exchange Commission]] |access-date=August 12, 2022 |archive-date=August 12, 2022 |archive-url=https://web.archive.org/web/20220812053717/https://www.sec.gov/Archives/edgar/data/1679788/000114036122015201/edge20001234x1_def14a.htm |url-status=live}}</ref>
| |
| }}
| |
| | |
| Goldman Sachs is launching coverage of Coinbase Global (COIN) with a Buy rating and a $306 price target for 36% upside. Goldman Sachs believes 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 Goldman Sachs believes that the continued success or failure of cryptocurrencies as an asset class will inevitably determine COIN’s longer-term fate, it believes 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 Goldman Sachs believes the core business today offers an attractive growth profile with the potential to drive high levels of profitability, Goldman Sachs sees significant white space for new
| |
| initiatives to drive more stable and recurring revenue streams to complement the core trading business over the longer term. | | initiatives to drive more stable and recurring revenue streams to complement the core trading business over the longer term. |
|
| |
|
| Key Takeaways: | | Key Takeaways: |
|
| |
|
| # 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, Goldman Sachs is 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, Goldman Sachs sees significant opportunity for COIN to benefit from its status as a critical element of the financial infrastructure for the ecosystem. | | # 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 Goldman Sachs sees continued strong growth in users driving solid organic growth for the business. While Goldman Sachs expects growth to continue, over time Goldman Sachs expects 1) retail commission pricing pressure (where Goldman Sachs highlights 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, Goldman Sachs believes investors are too focused on the impact of prices and less focused on the impact of volatility, which Goldman Sachs believes is the bigger driver in the near term. Goldman Sachs leverages 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 (Goldman Sachs believes $4.6bn for the “low” scenario and $9.5bn for the “high” scenario). Lastly, Goldman Sachs sensitizes its 2023 transaction revenue forecasts for various price and volatility environments. | | # 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. |
| # Significant white space for additional products: While just 4% of COIN’s revenue now comes from non-trading activities, Goldman Sachs believes 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. Goldman Sachs believes 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). Goldman Sachs also sees collateralized lending (similar to margin lending) as a significant opportunity, as Goldman Sachs projects a ~$75bn lending opportunity for the crypto industry. Goldman Sachs also expects strong growth in custody revenues driven by strong growth in institutional AUM. Lastly, over a longer period of time, Goldman Sachs sees 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. |
| # 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 Goldman Sachs expects to take a mark to market approach as prices fluctuate. Given COIN’s high levels of profitability at current crypto prices, Goldman Sachs models ~30-40% EBITDA margins over time. That said, on our current expense base, Goldman Sachs sees 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. |
| # Valuation: Goldman Sachs values COIN using a EV/Sales approach given the high growth rates and volatile margin profile of the company. Goldman Sachs looks 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. | |
|
| |
|
| ==Best way to gain exposure to the expansion of the crypto-native ecosystem== | | ==Best way to gain exposure to the expansion of the crypto-native ecosystem== |
Line 692: |
Line 666: |
| could increase by as much as 70%, whereas we see roughly 30% downside in our | | could increase by as much as 70%, whereas we see roughly 30% downside in our |
| down 50% scenario. | | down 50% scenario. |
|
| |
| ==Regulatory concerns and key risks to our price target and investment view==
| |
|
| |
| The nascency of the cryptocurrency industry as well as its overlap with one of the core
| |
| functions of governments in providing a means of exchange in the economy lead to
| |
| significant risks to the crypto industry over time. Below we walk through a handful of
| |
| these risks.
| |
|
| |
| Risks of governments moving against cryptocurrencies: One of the biggest risks to
| |
| our view is geopolitical, as governments usually have sole responsibility for
| |
| administering local currencies, and a product such as crypto that presents itself as a
| |
| substitute for government fiat currency could face additional regulation or outright bans
| |
| in the future. For example, in March 2021, the Indian government was in the process of
| |
| proposing an outright ban on cryptocurrencies that would prevent the ownership,
| |
| mining of, and transactions in cryptocurrencies. In addition, the Turkish Central Bank
| |
| recently decided to ban cryptocurrencies as a form of payment, citing concerns over
| |
| volatility and the lack of regulation. While we believe the nature of a decentralized
| |
| system running on the internet would make it very challenging to completely get rid of
| |
| cryptocurrencies, we believe the biggest lever that governments have at their disposal is
| |
| the control over the convertibility of fiat currencies into cryptocurrencies. If governments
| |
| restrict banks from facilitating the convertibility of cryptocurrencies with fiat currency by
| |
| not allowing banks to do business with crypto firms or to offer depository services to
| |
| crypto firms, we believe the value of crypto currencies would be negatively affected as
| |
| their perception by the public as a store of value or a medium of exchange would
| |
| diminish. This could potentially result in falling crypto prices, which in turn could lead to
| |
| accelerating pressure on crypto prices, as declining value could lead to further loss of
| |
| faith in crypto prices, not dissimilar to a bank run in a traditional banking sector where
| |
| fears over the convertibility of bank deposits into cash leads to withdrawals, leading to a
| |
| liquidity crunch and a self-fulfilling prophecy of total loss of faith of the bank’s ability to
| |
| remain solvent.
| |
|
| |
| The current state of government regulation is mixed. The United States has recently
| |
| taken steps to normalize the crypto industry by allowing banks to offer custody for
| |
| crypto assets and by providing OCC charters to certain custody agents in the industry.
| |
| In China, the government has been experimenting with central bank digital currencies, a
| |
| move that has the potential to drive more crypto-native means of exchange activities
| |
| through state-backed crypto assets, which could be a catalyst for crypto adoption. That
| |
| being said, it remains unclear whether state-sponsored crypto assets will catalyze or
| |
| crowd out non-state-sponsored crypto assets over the long term.
| |
|
| |
| Risks from US securities regulations: The regulatory status of various
| |
| cryptocurrencies has been in flux over time and could lead to uncertainty in the future if
| |
| the regulatory framework shifts. Today, Bitcoin and Ethereum, the two largest
| |
| cryptocurrencies are officially regulated as commodities in the United States and
| |
| therefore fall under the CFTC for regulation. That said, the regulatory status of other
| |
| crypto assets is less clear. For example, in December 2020, the SEC filed a lawsuit against Ripple Labs, the company behind the Cryptocurrency XRP, claiming that the
| |
| company conducted $1.3bn of unregistered securities sales, implicitly deeming XRP to
| |
| be a security. This led to a selloff in XRP (Exhibit 62 - although it has more than
| |
| recovered since then) and resulted in some cryptoexchanges, including Coinbase, to
| |
| delist XRP. Coinbase noted in their S-1 that they have a policy of not listing assets that
| |
| are likely to be deemed a security given that the company does not have the regulatory
| |
| licensing to list such assets. However, because of the lack of clarity around this issue, it
| |
| is possible that COIN could incorrectly categorize certain cryptocurrencies, as was
| |
| alleged to be the case with XRP. While this is the most recent example of such issues,
| |
| we believe that in general, the changing landscape for cryptocurrency regulation will be
| |
| a focal point among investors.
| |
|
| |
| KYC / AML: In the traditional finance space, banks and payment companies play a large
| |
| role in detecting and preventing money laundering, from reporting large cash
| |
| transactions to flagging suspicious activity, as well as conducting rigorous “Know Your
| |
| Customer” (KYC) checks when onboarding new clients. This, combined with the highly
| |
| ringfenced nature of the USD payments system (with a few exceptions, only banks can
| |
| hold and transfer Federal Reserve balances) means the US Dollar system and other
| |
| similar monetary systems have significant safeguards in place to prevent money
| |
| laundering and transfers of illicit funds. The decentralized nature of cryptocurrencies, on
| |
| the other hand, means there are fewer inherent checks on potentially illicit behavior, and
| |
| thus there is a very high bar to clear for cryptocurrency companies to accept fiat
| |
| currency payments and allow for deposits and withdrawals of fiat currency, because
| |
| there is a risk that the money being deposited or the cryptocurrency used to fund the
| |
| fiat currency withdrawals was sourced through extra-legal activities. Crypto is often
| |
| compared to “digital cash” due to it sharing some of the same features of physical cash,
| |
| such as being a bearer instrument and not requiring an intermediary to facilitate
| |
| transactions. The decentralized nature of physical cash without oversight from
| |
| intermediaries is why physical cash is often used for illicit activities, and the ability to
| |
| transfer cryptocurrency in large sums across great distances means that there is an
| |
| even greater risk of illicit activity in cryptocurrencies relative to cash. Thus, there is a
| |
| much higher bar for KYC/AML controls to ensure compliance.
| |
|
| |
| Coinbase is widely reported to have taken a measured and deliberate approach to
| |
| compliance, having worked with regulators from its beginnings to invest in the
| |
| infrastructure to satisfy BSA/AML laws and gain access to the US banking system. We
| |
| expect that as a ~$2tn asset class, governments around the world will continue to place
| |
| a high degree of scrutiny on compliance regimes at crypto-native companies, and the
| |
| larger the space becomes and the more regulatory focus it attracts, the greater
| |
| competitive moat COIN’s approach to compliance should represent.
| |
|
| |
| Cybersecurity / custody risk: Many management teams at traditional financial services companies will cite cybersecurity incidents as the risk to the business that “keeps them
| |
| up at night.” The cryptocurrency industry faces similar issues with the added risk that a
| |
| 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
| |
| cryptographic properties of blockchain technology make it effectively impossible for the
| |
| 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.
| |
|
| |
| Coinbase highlights their track record of having never had a cybersecurity incident that 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.
| |
|
| |
| Lastly, we note that at a more operational level, downside risks to our positive investment view on COIN include lower levels of crypto volatility and lower commission rates.
| |
|
| |
| == References ==
| |
| [[Category:Thesis]]
| |
| [[Category:Equities]]
| |
| [[Category:Coinbase]]
| |
| __INDEX__
| |
| <references />
| |