Coinbase: Building A Scalable Crypto Platform With Multiple Revenue Streams

Summary Coinbase is set to benefit from stablecoin adoption and its strategic partnership with Circle, driving stable, recurring revenue growth. The company’s shift toward subscriptions and services, especially via Coinbase Base, diversifies its business beyond volatile trading fees. Despite competitive risks and margin pressures, my valuation of $394 per share offers a 28% premium, with an 86% probability of upside. I recommend buying Coinbase, as it is well-positioned to capitalize on the stablecoin revolution and decentralized applications growth. Investment thesis The explosion of stablecoin adoption is going to benefit Coinbase ( COIN ) handsomely due to its dual relationship with Circle Internet Group ( CRCL ). The company is not a leader in the crypto exchange platforms industry, but it is gaining scale and diversifying away from a volatile transaction business to a subscription model with Coinbase Base. My value estimate is $394 per share, representing a 28% premium over its current stock price. I recommend buying the stock. Relationship with Circle One of the most valuable things about Coinbase is its relationship with Circle Internet Group. Stablecoins are different from Bitcoins or other traditional cryptocurrencies. Stablecoins are a payment network, as they are directly linked to a fiat currency. As Circle has been ascending in the stock market, Visa ( V ) and Mastercard ( MA ) have decreased by 5%-7% in market value (Figure 1). FIgure 1: Seeking Alpha Two kinds of relationships add value for Coinbase. First of all, Coinbase holds 3.7% of Circle shares. Coinbase’s equity raise as Circle’s market value increases. In Figure 2, you can see how Circle’s run-up from IPO has pushed Coinbase’s price further up. Figure 2: Seeking Alpha The second relationship is based on the distribution of USDC from Circle. Coinbase earns 100% of the reserve income if the USD is held on Coinbase’s platform. Remember that for each USDC, Circle invests $1 in US treasuries or any cash equivalent to the dollar, and any interest from those assets is the revenue for Circle that is shared with Coinbase. If the USDC is held on any other platform, the reserve income is split by 50%. Both types of relations with Circle are positive for Coinbase, as stablecoins are cryptocurrencies that have a non-speculative value. It is a payment platform that is going to disrupt the payments industry, and it will be supported by a new regulatory framework, the GENIUS Act, which was approved by the Senate and is pending further approvals. The company is reaching the necessary scale with a diversified approach Revenue grows at a reasonable pace, with $2 billion in the last quarter, at a pace of 40.3% year over year. Monthly transacting users grow 21% to 9.7 million, and trading volume grows 26% to $393 billion. Its trading volume is healthy, growing in the consumer segment by 39% to $78 million and in the institutional segment by 23% to $315 billion. However, the company is not taking advantage of all this new incremental activity, as Consumer transaction revenue has grown only 17% to $1.095 billion, and institutional transaction revenue has grown 16% to $99 million in the last quarter compared to the same quarter last year. FIgure 3: Author based on the company’s financials I consider the subscription and services segment to be the critical component of its business model, as it is more stable than trading revenue, diversifying the cash flow stream. It is growing handsomely at 36.6% to $698 million. This subscription service is driven by stablecoin revenue, especially USDC, which is growing at 51%. It is especially relevant due to the distribution relationship with Circle, which is a key point in my investment thesis. Another good news and critical for me is that Other subscription and services are up 47%, diversifying away from the volatile transaction segment. Inside this category, I consider promising what the company is doing with Coinbase Base. As the company defines : “Base is an Ethereum Layer 2 (L2) blockchain solution developed and incubated by Coinbase, designed to offer a secure, low-cost, and developer-friendly environment for building decentralized applications (dApps)” The Deribit acquisition will provide Coinbase with diversification in its portfolio and geography. Deribit is the largest crypto options platform and is a product that Coinbase doesn’t hold, a complementary fit. Additionally, it will help them expand their business beyond the US. FIgure 4: Author based on the company’s financials Margins have deteriorated from 41.3% to 36.1% (Figure 5), excluding gains and losses on crypto, which is too volatile to evaluate the underlying business. Transaction expenses have grown 39.4%, more than revenue growth, due to pressure to monetize its network activity. General and administrative costs are growing close to 40%, which is the type of cost that you will want to erase. The company is making an effort to control expenses with technology and development, maintaining the same expenditures as the same quarter a year ago. And it is partially financing the push in sales and marketing, with expenditure growth at 150%. Figure 5: Author based on the company’s financials Figure 6 illustrates the efforts the company is making to gain traction and scale the business. And I think it is going in the right direction. In the last trailing years, the company has increased revenue to $6.8 billion and lowered operating expenses from 134.5% to 50.9%, and I hope it will continue to improve. Figure 6: Author based on the company’s financials Valuation Figure 7 illustrates the company’s value drivers, considering a year as the last four quarters to capture the most recent information. Regarding margins, I utilize a measure I call Cash Margin, which involves adjusting net income for non-cash items such as amortization and depreciation, stock-based compensation, and deferred income tax. Figure 7: Author based on the company’s financials From the current 80% trailing revenue growth rate, I estimate that revenue will grow at diminishing rates until reaching 25% by 2028 and later on. This is a regular pattern of a growing company. The cash margin is set at the current 45% trailing value for the entire period of my model. I think it is a conservative assumption, as I have described the company is improving its scale, and it will continue to do so over the next years. Change in net working capital will stabilize at -5% of revenue, as its growth will mean certain pressure on working capital. Cash flows will be discounted at an 18.2% WACC because the beta is 3.62. The risk-free rate is 4.5%. The company’s leverage is 5%, considering equity as market capitalization, and I consider $328 million of excess cash. The perpetual growth rate is set at 3%. Figure 8: Author Based on Figure 8, I estimate a value of $394.4 per share, a 28% premium over its current stock price. As seeing in Figure 9, my valuation has an implied 51 Price-To-Free Cash Flow multiple that is what the company has at the end of last year or a year ago. Data by YCharts Figure 9 Two main risks: competition and crypto relevance Binance is the major player in the industry, with 38% of the market share and $482 billion in transaction volume a month. Second place goes to Gate.io , with a 9.0% market share and $114 billion in transaction volume. Coinbase is the sixth player with 7% market share, 9.7 million monthly transacting users, and $88 billion in the last quarter. Binance offers more cryptocurrencies, over 350, compared to Coinbase’s 240, and lower transaction fees, such as 0.1%, compared to Coinbase’s 0.6% to 1.2%. The main risk here is the potential for concentration due to higher competition. As platforms are more expensive and scale gets more relevant, fewer competitors will be able to keep pace with those investments. That can happen to Coinbase, resulting in lower margins and reduced revenue. I have described stablecoins as cryptos that create value and are useful as payment platforms. The rest of the cryptocurrencies are mainly speculative, in my opinion, with no fundamental value. Any bursting of the bubble will damage its revenue and margins. The risk is not life-threatening because, in the short term, with the support of the Trump administration, cryptocurrencies are expected to increase in volume. In the long term, Coinbase’s business model will be supported by stablecoins and Coinbase’s Base, exploiting a platform for building decentralized applications, dApps. I have modeled those risks as a triangular distribution function where revenue is set as -5% as the lower limit, with a probability of 5%, and 2% as the upper 95% probability. It is an asymmetric function due to the risks outlined in this section. This variation means that in an extreme case, revenue would grow at 20% instead of 25%. On margins and net working capital variation, I am modelling a symmetric function as I see the same possibilities to the upside as the downside. In the Cash margin, there are the risks mentioned before, but the scale Conibase is getting can improve further. It is set as -3% as the lower limit, with a probability of 5%, and 3% as the upper 95% probability. And in Net working capital variation is set as -2% as the lower limit, with a probability of 5%, and 2% as the upper limit with a 95% probability. The result of the Crystal Ball simulation is that there is 86.4% probability of getting a value estimate higher than the current stock price, and revenue growth explains 85.5% of the variation, and cash margin 9.9% of it. Conclusion In today’s world, crypto is supported by the US government. I believe that there is a disruptive revolution with stablecoins, and Coinbase is taking advantage of it. The company is growing in this front, and this expansion is allowing it to capture scale while diversifying in products like Coinbase Base, entering the space of decentralized applications, dApps. I recommend buying the stock, as my value estimate is 28% above its current price of $394.4 per share, with an 86% chance of getting a value higher than its current stock price. The company has a Price-To-Free Cash Flow multiple of 51, which it has already achieved in the past.

Source: Seeking Alpha