Why Coinbase's 'Premium Valuation' Is Unjustified In The Eyes Of This Analyst

Coinbase Global Inc COIN, the second-largest spot cryptocurrency trading platform, faces intensifying competition and has a premium valuation unjustified by its current revenue structure, according to U.S. Tiger Research analyst Bo Pei. 

The Coinbase Analyst: Pei initiated coverage on Coinbase with a “Sell” rating and a $135 price target.

The Coinbase Thesis: The analyst said Coinbase’s revenue is primarily a function of cryptocurrency market performance and transaction fees. Pei said he sees competition intensifying almost in all aspects.

“Despite being an exchange, COIN's business relies on acquiring new retail users, making it comparable to consumer-facing FinTech companies,” wrote Pei in a note seen by Benzinga.

Pei said that while Coinbase and cryptocurrency miners have different businesses, their revenues are highly correlated to volatile cryptocurrency markets.

“Our $135 price target is based on 4.0x '23E sales, 1.3 turns higher than crypto miners' average, but 0.3 turns lower than FinTech [companies], as COIN's revenue and profit heavily rely on the crypto price but benefit from increasing crypto adoption,” according to Pei.

The analyst said both Coinbase’s mobile app and Coinbase.com charge retail investors a transaction fee of nearly 1.9% — higher than other centralized exchanges that charge between 0.1% to 1%.

Pointing to Glassnode data, Pei said the number of Bitcoins BTC/USD on Coinbase fell from nearly 1 million in December 2020 to almost 650,000, while those on Binance, the largest spot exchange by volume, doubled from less than 300,000 to 600,000 in the same period.

Pei noted that Coinbase’s spot trading volume share rises when crypto-assets boom, but as users mature, they migrate to lower-fee platforms such as Coinbase Pro and Binance.

Adding to the competitive pressures are decentralized exchanges or DEXs. Pei said Uniswap’s average daily trading volume has risen from less than $2 million in 2019 to over $3 billion recently and exceeds that of Coinbase.

Even though revenue from staking and custodial services has risen steadily for Coinbase, they are linked to cryptocurrency prices and unable to stabilize its revenue in a bear market. Coinbase's offerings are also less attractive than its rivals when it comes to yields and token options.

Coinbase’s cryptocurrency derivatives foray is still subject to regulatory uncertainties, according to Pei. Furthermore, derivative trading is undertaken by investors who are sensitive to trading costs.

Coinbase Price Action: On Wednesday, Coinbase shares closed 3.8% lower at $196.70 in the regular session and rose 0.4% in the after-hours trading, according to Benzinga Pro data. 

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