Coinbase (NASDAQ:COIN) is scheduled to go public on April 14 in a direct listing that will see America’s largest cryptocurrency exchange sell shares directly to investors, foregoing the traditional initial public offering (IPO) process.
As I write this, a reference price has yet to be set. Nasdaq will set this price as a guidepost for investors in consultation with Coinbase’s financial advisors. It’s often the most recent trading price for shares sold in the private markets.
The latest price investors paid for its shares on the private markets was $343. It valued the company at $68 billion.
According to page 81 of its S-1 registration, Coinbase will have 21.04 million Class A common stock and 165.0 million Class B common stock outstanding. Add in 113.3 million shares of Class A and Class B to be issued at some point in the future, and we get 299.3 million shares outstanding. Based on the $68 billion pre-IPO valuation, the reference price would be $227.20 per share.
However, I’m writing this before we know the actual amount, so for this article, I’ll argue Coinbase’s valuation at the end of April 14 trading will be $136 billion, or double its pre-IPO value.
Here’s why.
Coinbase IPO Could Be Record-Setting
It’s crazy to think that Coinbase could finish its first day of trading worth $136 billion. However, nothing involving cryptocurrencies seems impossible at this point.
Fortune published a recent article that featured the opinions of New Constructs research analyst David Trainer.
“To justify that number, the math shows, Coinbase would need to mushroom into the biggest financial exchange in the world. ‘It’s part of the overall frenzy creating bubbles everywhere,’ says Trainer. ‘When you do the numbers, there’s no way to make an argument for owning this stock with a straight face.’”
And that’s despite the fact it generated an operating profit of $409 million (-$45 million in 2019) from $1.14 billion in revenue ($483 million in 2019).
Based on a $100 billion valuation, Coinbase would debut at 88 times its trailing 12-month (TTM) and 244 times operating income. To get to $136 billion, it would be valued at 119 and 333 times revenue and operating profits, respectively.
Trainer argues that for Coinbase to be worth $100 billion by 2027 – six years from now, not today – it would need to grow revenues to $21.3 billion with a free cash flow margin of 15%, or $3.2 billion.
The analyst goes on to argue that even with Nasdaq-like growth, it would only be worth $18.9 billion, a far cry from $136 billion, or $100 billion for that matter.
The logical side of my brain agrees 100% with Trainer’s assessment. However, the cryptocurrency movement is anything but logical. History Shows IPO Prices Don’t Last
Whether we’re talking about traditional IPOs or direct listings, investors generally have opportunities to buy these stocks for less than what IPO investors paid within the first 12-24 months of going public.
In May 2018, I discussed 7 tips for new investors. One of them was to skip IPOs:
“Do not buy IPOs. Not through the actual offering or on the first day of trading. I think it’s best to wait at least six months to a year before jumping in so you can figure out whether a company’s financials and business are for real.”
This wasn’t my own idea. I got the piece of advice from Canadian billionaire money manager Stephen Jarislowsky, who found in his experience, you could buy most new issues for less, 12 to 24 months later.
In the case of Coinbase, the fact that it’s likely to jump in a big way on the first day of trading means you really need to be patient before you make your initial buy into the highly touted stock.
To put things in perspective, Nasdaq Inc. (NASDAQ:NDAQ) and Intercontinental Exchange (NYSE:ICE) have market capitalizations of $25.7 billion and $66.0 billion, respectively. To finish its first day of trading with a market cap almost 50% higher than the two established exchanges combined is ludicrous.
But it could happen.
The Bottom Line
If you are lucky enough to get Coinbase stock near its reference price, I would be quick to sell, especially if it jumps 50% 100% on its first day of trading, which seems all but certain at this point.
Whether we’re talking $68 billion, $100 billion, or $136 billion, Coinbase is greatly overvalued. That doesn’t mean investors won’t be willing to pay up to own the burgeoning exchange’s shares.
It is what it is.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.