I hope that everyone found the one week hiatus to be relaxing. Over the next couple of weeks I hope to share some of my research on Coinbase as an investment. A number of US tech unicorns including Lyft, Uber, Palantir, and Slack, amongst others, are planning their IPO for this year. I wouldn’t be surprised if Coinbase plans their IPO in the next year while the market is still strong and institutional players have a record high amount of dry powder to invest in the market. A period of low interest rates have created a low cost of capital environment and an increasingly difficult competition for yield. That being said, I will take a deeper dive into the different facets of Coinbase’s business model and hope to develop a solid stance on the investment prospect of Coinbase when it decides to go public.
First, I will evaluate the strengths of Coinbase. Some of Coinbase’s major advantages that I will address in this article include: strong margins, first mover advantage, strong investor backing, and low competition in the fiat to crypto gateway space.
Coinbase has relatively low costs now that its core products are operational. These include the maintenance of Coinbase, Coinbase Pro, and its institutional services. Other main expenses include marketing and research/development. That being said, the total overheads of the core product offerings are relatively low compared to other business. This holds true for many tech companies once their product is developed. Coinbase reported a net profit of $380 million on $923 M of revenue. This is an incredibly high net margin of 41%. The average tech company has a net margin of 17%.
Founded in 2012, Coinbase had about four years to develop its platform before the crypto craze hit retail investors. It is viewed as one of the most secure, trustworthy and straightforward exchanges for retail investors. There are few other exchanges- maybe Poloniex, Kraken, or Bitfinex- that are also trustworthy, but Coinbase has the brand power that attracts many first time users. For the customer friendly platform and services that Coinbase offers, they do take a hefty fee that is larger than many other exchanges- a great sign for their bottom line. They take anywhere from 1.5%-5% on transactions, but also offer Coinbase Pro for more advance traders that take less than 0.25%, competitive with many other exchanges.
Finally, Coinbase has a significant investor backing from well known investors such as Wellington Management, Tiger Global, and Greylock Partners. These funds can offer their wealth of business experience as well as additional funds that could be necessary for Coinbase’s future expansion and adaptation to a changing cryptocurrency market. It will be interesting if strategic advisory from these major funds can help Coinbase achieve its target $456 M revenue for fiscal year 2018, despite a downturn in the crypto market. Revenue results have not be released yet.
In next week's edition I will be highlighting some of Coinbase’s weaknesses that have crypto bears doubting its $8B valuation.