A Wall Street expert breaks down why Coinbase’s ‘ridiculously high’ valuation should be 71% lower — and warns that the frenzy around the new stock is yet another example of why the broader market is in a bubble.
- Shares of Coinbase have been volatile since going public on Wednesday.
- New Constructs’ David Trainer said its valuation should be 71% lower than current levels.
- Trainer also said speculation around the stock is another indication of a broader bubble.
- See more stories on Insider’s business page.
The direct listing of Coinbase, a cryptocurrency trading platform, hasn’t disappointed in terms of simply being a spectacle.
Its price action during its first two days of trading has been as volatile as some of the digital assets that it allows people to trade.
Shares of the firm soared briefly on Wednesday, their first day of trading, before quickly reversing course and falling almost 20% on the day. They then rose 6% in after-hours trading, partly because ETF behemoth Ark Invest bought $246 million worth of them. But shares then dropped 7% again during intraday trading Thursday.
Where will the stock go from here, and is it worth buying now? The cryptocurrency space clearly has tailwinds, with major Wall Street institutions like Goldman Sachs now accepting bitcoin. But many argue that even if cryptocurrency adoption grows, Coinbase’s valuations are simply too high to see any further logical upside gains.
Count David Trainer in that group. The CEO of investment research firm New Constructs said in a recent note that the firm’s valuation should be $18.9 billion, 71% lower than its current market cap of $65.5 billion.
In an April 9 note, Trainer laid out several reasons why he thinks the company won’t live up to anything close to its initial $100 billion valuation.
Why Coinbase faces a tough road ahead
Trainer first argues that crypto is a niche market and not mainstream. This is of course why so many people like the firm: the potential for massive appreciation as adoption remains relatively limited. But Trainer seems to cast doubts that it will achieve ubiquity.
Beyond broader adoption, however, Trainer sees Coinbase losing market share as competitors move into the space. He also predicts this significantly wipes out their profitability.
“In 2020, Coinbase collected ~0.57% of every transaction in fees, which totaled $1.1 billion in trading revenue on $193 billion in trading volume. In total, these trading fees made up 86% of revenue in 2020,” Trainer said.
He continued: “As the cryptocurrency market matures and more firms inevitably pursue Coinbase’s high margins, the firm’s competitive position will inevitably deteriorate. For example, if stock trading fees are any indicator for crypto trading fees, we should expect them to quickly go lower if not to zero.”
Still, even current profit levels aren’t nearly enough to justify such a high valuation. Revenue would have to grow to a number larger than the Intercontinental Exchange — which is the parent company of the New York Stock Exchange — and Nasdaq combined to meet valuation to justify a $100 billion valuation, Trainer said.
This is laid out in the chart below.
Indication of a bubble?
Trainer said there is no investment case for Coinbase, and that investors should be aware of the risks involved with the stock.
With the financial system liquid amid friendly monetary policy, and as investors bid up prices of assets like bitcoin, houses, and meme stocks, Trainer said the speculation in Coinbase is another indication that the broader stock market is in a bubble.
“Everything’s kind of upside down,” Trainer told Insider in an interview this week. “Very few of the bull-case arguments make any fundamental sense.”
He said it’s “entirely likely” that the market sees a pullback this year. But he advised that investors “shouldn’t fight the Fed,” which is keeping interest rates low and keeping up its quantitative easing efforts, and that policymakers and elected officials would likely intervene in a market crisis.
“You have to recognize how much of our society is geared to preventing that,” he said. “From Powell, to the President, to Congress, the SEC…No better example of how well markets are protected from a potential crash than a year ago.”
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