There is buzz that the massive direct listing of Coinbase (COIN) is similar to the Netscape IPO of the mid-1990s. Netscape represented the ushering in of the dot-com boom, whereas the Coinbase offering reflects an inflection point for cryptocurrency.
Well, for investors, the analogy should be taken with some caution. Remember, Netscape no longer exists, as it was Google that would ultimately win the war.
Despite this, there is certainly considerable enthusiasm for Coinbase shares. When COIN made its public market debut on April 14, the company’s market value exceeded $85 billion.
As for the direct listing, this means that Coinbase did not raise any capital in the transaction. Then again, it really does not need any. The fact is that the company is highly profitable.
The company recently announced preliminary results for the first quarter, and they were jaw dropping. Revenues soared by 9X to $1.8 billion and net income landed within the range of $730 million to $800 million. To put things into perspective, last year, revenues were $1.28 billion and net income was $322.3 million.
Let’s take a closer look at the company.
Background On Coinbase
Back in the summer of 2012, Brian Armstrong came up with the idea for Coinbase. He wanted to develop a digital wallet to make it possible for anyone to buy and sell Bitcoin. He had the technical skills to build the app as he had previously been a software engineer at Airbnb.
However, he wanted to have a co-founder that could bring business and finance experience to the table. So, he used Reddit and connected with Fred Ehrsam, who was a trader at Goldman Sachs.
The match was spot on. They would go on to pitch to Y Combinator, with the duo ultimately getting accepted to the startup program and receiving a $150,000 investment. It was a gutsy move as Bitcoin was trading at $6 and was considered a backwater of the financial system.
So, how did Coinbase become so successful? Part of the reason was its focus on building a secure and compliant platform, which instilled trust in the marketplace and helped to avoid run-ins with regulators. The strategy was also critical in getting participation from institutional investors.
The result is that Coinbase has become the largest crypto marketplace in the U.S., with it boasting 43 million retail investors, 7,000 institutions and 115,000 ecosystem partners that span more than 100 countries.
According to Coinbase’s S-1 filing, “Today, the way that we invest, spend, save, and generally manage our money remains cumbersome, inaccessible, expensive, and regionally isolated. In contrast, the internet has transformed our society by connecting the world and enabling the seamless exchange of information. The legacy financial system is struggling to keep pace with the speed of technological advancements in a global and digitally interconnected society, resulting in the need for a new, natively digital financial system.”
Analysts Weigh In
Looking at the consensus breakdown, only Buy ratings, 4 to be exact, have been assigned in the last three months. So, the consensus rating is a Strong Buy. Given the $536 average analyst price target, shares could surge 57% in the year ahead. (See Coinbase stock analysis on TipRanks)
Regardless of the success of Coinbase, there are still notable risk factors. Cryptocurrencies are still in the early stages of development and volatility is likely to continue. In 2019, Coinbase posted a loss of $31 million because of the plunge in Bitcoin.
Another nagging issue is the potential for regulation. Treasury Secretary Janet Yellen seems to be no fan of cryptocurrencies. There has also been skepticism from Federal Reserve Chairman Jerome Powell. This week, he noted, “[Cryptocurrencies are] really vehicles for speculation. They’re not really being actively used as payments.”
On top of this, there is a relatively high fee structure, which could be tough to sustain. Just look at what has happened with equities trading. In response to Robinhood’s zero commission strategy, other brokerages had little choice but to follow suit.
In other words, even if cryptos experience continued growth, this may not be enough to keep up the momentum for Coinbase.
Disclosure: On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.