Summary Coinbase is the largest publicly traded company exposed to crypto assets in the US, with a strong brand and rapid user growth. Valuation analysis suggests that COIN is undervalued by 47%, with a fair share price of $311. The volatility of cryptocurrencies poses risks, but as the industry develops and penetrates further, crypto assets are expected to become less volatile over time. Introduction Coinbase ( COIN ) is by far the largest U.S. publicly traded company exposed to crypto assets. Being the dominating crypto exchange in the world's largest economy provides COIN with a robust brand which allows to attract new users at an impressive pace. The company's financial performance is still highly volatile, but as the penetration of crypto assets in our lives deepens, I expect the financial performance of the overall industry to become smoother and more predictable. My valuation analysis suggests that COIN is still massively undervalued, which makes the stock a "Strong Buy". Fundamental analysis According to coingecko.com , Coinbase is the world's fourth-largest centralized crypto exchange by trading volume. However, the first three spots are Asian companies and exchanges like Upbit and OKX which are not available in the U.S. Binance is mostly available in the U.S., but not for all regions and states . That said, within the United States, Coinbase is a dominating centralized crypto exchange with the above 70% market share . Coingecko.com Having such a dominance in the emerging industry within the world's largest economy provides Coinbase with a solid basis because the size of an exchange matters a lot from the perspective of customers' confidence. In my opinion, people who earned and saved their money through hard work are more likely to place their funds to the largest exchange because there is always a "too big to fail" perception which supports the largest financial institutions. The public image of the U.S. the largest centralized crypto exchange allowed COIN to expand its users' base by almost three times between 2020 and 2022 . Since Coinbase is the largest crypto exchange in the U.S. by a wide margin, the company is poised to benefit from secular changes in the industry. According to Statista , the penetration of crypto assets in the U.S. is expected to expand from 26% in 2024 to 29% by 2028. The deeper penetration of crypto assets in the U.S. will be beneficial for COIN because it means higher demand for crypto assets in future and more transactions at centralized exchanges. There are also several other signs which evidence that the industry of crypto assets has a bright future. Since Bitcoin ( BTC-USD ) is by far the most popular and widespread cryptocurrency, I will emphasize the expansion of crypto assets on the example of BTC. The adoption of Bitcoin as an official currency in El Salvador is a real breakthrough. Of course, El Salvador is apparently not the largest economy in the world , but this adoption is a big milestone for crypto assets. If El Salvador's case with Bitcoin is successful, it might serve as a great example for other countries. In large countries and economies like the U.S., China, or India, Bitcoin is not adopted as legal tender yet. However, according to insidermonkey.com , tens of millions of people own cryptocurrencies in each of these countries. America's hyper scale companies like Microsoft ( MSFT ) and AT&T ( T ) accept Bitcoin as a means of payment. The luxury sports car manufacturer, Ferrari ( RACE ), has started accepting crypto as payment for its cars in October 2023 . Reuters It is also essential, that crypto assets does not only penetrate our lives as a means of payment, but expand to capital markets. This year is also a big milestone for cryptocurrencies, as the iShares Bitcoin Trust ETF ( IBIT ) went public in January. Despite being a young ETF, it already has more than $17 billion in AUM and trading volume looks impressive. An ETF on spot Ethereum ( ETH-USD ) is also in the pipeline of iShares. Both of these developments will likely attract even more attention to crypto assets and are highly likely to improve trust in them. SA To conclude the fundamental analysis, Coinbase is America's most prominent company in an industry poised to disrupt the way people around the world pay, save, and invest. The penetration of crypto assets will likely increase public interest and demand for them, leading to greater transaction volumes, which will benefit COIN. Therefore, I am very bullish about the company's future prospects. Valuation analysis COIN's momentum looks unstoppable as the share price demonstrates strong dynamic across various timeframes within the last twelve months. The company's market capitalization surpassed $50 billion after the big rally of recent months, and I must analyze whether the current share price is adequate from the prism of future cash flows. That said, I am running the discounted cash flow ("DCF") model with an 11.5% WACC . Considering the expected 20.3% CAGR for crypto-exchanges market size for the next several years, I think that using a 6% constant growth rate for the terminal value ("TV") calculation is fair. For years between 2025-2028, I use a 20.3% CAGR, which I referred to above. I use a flat 50% TTM levered FCF margin for the whole DCF period. According to Seeking Alpha , there are currently around 242 million COIN shares outstanding. Calculated by the author The DCF suggests that the fair share price is $311, which means that the COIN is undervalued by 47%. The discount appears to be a real steal to me, even despite aggressive underlying assumptions and early stages of the whole industry's development. Conducting a peer analysis of valuation ratios for Coinbase seems impossible because there are no publicly traded crypto exchanges of comparable size. Even Binance, the world's largest crypto exchange, is a privately held company. Without context, Coinbase's valuation ratios are sky-high , but I would not recommend looking at them without anything to compare them to. Therefore, I recommend that my readers to rely more on the DCF in case of COIN. Mitigating factors Cryptocurrencies are extremely volatile, making investing in them inherently risky. This volatility attracts much larger trading volumes when the crypto market is bullish, and vice versa when stablecoins tumble. As we can observe, trading volume halved between 2021 and 2022. The main reason was that Bitcoin crashed after the Fed initiated its tightening of monetary policy to combat inflation. COIN's 10-K report With such a volatility across key business metrics, it is unsurprising that COIN's revenue and share prices have also been extremely volatile in recent years. As shown below, revenue skyrocketed by almost six times between 2020 and 2021 with a subsequent more than 50% drop in 2022. The big revenue drop was accompanied by the nosedive of the share price from $350 to below $50. The new rally in cryptocurrencies in 2023 was a big catalyst for COIN, and the share price grew by several times once again. Data by YCharts Not every investor is ready to tolerate such volatility, and I have to warn about this risk. However, as the penetration of cryptocurrencies is poised to deepen in future, I expect this asset type to become much less volatile over the long term. Conclusion COIN looks to me like the company of the future. The trend of cryptocurrencies penetrating into our lives deeper is secular, and I think it is unlikely to reverse. As the by far the largest crypto company in the United States (the world's number one economy), Coinbase is in a pole position to capitalize on this secular trend. Investors should understand that the stock is extremely volatile, but as the crypto-economy expands its reach, I expect crypto assets to become less volatile over time. According to my valuation analysis, the stock is attractively valued, and I am inclined to assign COIN with a "Strong Buy" rating.
