2022 is here and it’s already been a whirlwind.
I’m not big into New Year Resolutions, but I do like setting goals. I break my goals into three different categories: family/relationships, personal, and health. Here are a few:
Family / Relationships: 1) Buy our first home 2) Have a fucking amazing wedding 3) Get a dog
Personal: 1) Get back to writing everyday 2) Monetize a side-hustle
Health: 1) Run a sub-1:45 half marathon since tearing my Achilles 2) Play soccer again since my injury
Goals are important. AND the systems used to reach those goals are equally as important.
“You do not rise to the level of your goals. You fall to the level of your systems.” - James Clear
“You only need to know the direction, not the destination. The direction is enough to make the next choice.” - James Clear
If you’re interested in setting your own goals, James Clear has a fantastic guide for Goal Setting and how to make them stick.
Aside from my own updates, 2022 has already generated tons of news-noise:
Start your day here: The U.S. considers moving troops to Eastern Europe
The Stock Market Just Suffered Its Worst Week Since 2020. Here’s What Comes Next.
Omicron surge worsens teacher shortage, closing more California schools to COVID
Talk about anxiety inducing. How is a single person suppose to digest all of this? I’m not sure how you get through the day, but, I reach for a totem. I reach for something small and something I can take action with.
I workout, or go for a fun, or read some Vonnegut, or look back at data and what happens over time. Michael Batnick wrote a wonderful piece on Reframing Volatility. TL;DR - Look at the chart below. The world has ended numerous times: WW1, WW2, the Great Depression, etc, etc, but we compound on.
Volatility is a short-term mindset. Volatility is something to get comfortable with. Life, Love, Money, and Work are long-term efforts that are about the grind and constantly ‘showing up’.
This week we are going to be looking at Coinbase ($COIN). As a reminder: The Rookie wants to own businesses that 1) I like, 2) are growing, 3) generate a high amount of free cash flow (or have the potential to), 4) have future optionality, and 5) are led by a great management team. NOTHING HERE IS INVESTMENT ADVICE. DO YOUR OWN WORK.
Let’s get started:
TL:DR
The Rookie Quick Fire Challenge - LINK HERE
Score 43.5 / 81
Overall Verdict: $COIN is interesting and I like it’s story. Could it go lower from here? Yes, of course and it seems like the market is focused on destroying all growth stocks. One BIG negative of $COIN is it’s close correlation to the price of Crypto and Bitcoin. I don’t like owning companies that are controlled by outside forces (i.e. Gold Miners are controlled by gold prices, oil producers are controlled by oil prices), and $COIN is strongly correlated with the volatility of the crypto market. With that said, $COIN offer tons of optionality and a call-option on the future of the cryptoeconomy
Coinbase ($COIN)
Step 1: Do I understand and like the business?
Everyone knows Coinbase and probably has a vague sense of what they do, but for the unfamiliar, $COIN (https://www.coinbase.com/) is a cryptocurrency exchange platform that was founded in 2012 by Brian Armstrong and Fred Ehrsam. On $COIN’s About Page, they describe themselves as:
We are building the cryptoeconomy – a more fair, accessible, efficient, and transparent financial system enabled by crypto.
We started in 2012 with the radical idea that anyone, anywhere, should be able to easily and securely send and receive Bitcoin. Today, we offer a trusted and easy-to-use platform for accessing the broader cryptoeconomy.
And they are doing it. Their platform is massive. Here are some high level numbers:
Talk about growth and adoption over a 12 month period. But what happened between Q2’21 and Q3’21? Trading volume, Net Revenue, Net Income…all DOWN. We will have to dig deeper, but as of right now…
As a note, Q4’ 2021 numbers have not been published yet (earnings call is scheduled for Feb 8th, 2022). $COIN’s management team addressed this slowdown in their Q3’21 letter to shareholders
Coinbase is not a quarter-to-quarter investment, but rather a long-term investment in the growth of the crytoeconomy and our ability to serve users through our products and services. We encourage our investors to take this point of view.
I like from my management team. Quarter’s aren’t enough time to judge a business and it’s strategy. One thing that I LOVE about $COIN is their continued efforts to become more than a marketplace. $COIN is positioning themselves as the leader of the cryptoeconomy, NOT just a marketplace for you to buy and sell crypto.
Some other highlights that I liked:
Growth in their Subscription and Services Revenue grew 41% sequentially to $145M in Q3
~28% of their 7.4 MTUs both invesqted and engaged with at least one other product in Q3’21
~49% of their 7.4 MTUs engaged with non-investing products such as Staking, Earn, Coinbase Card, etc.
These are all fantastic numbers. Not only are we seeing engagement grow QoQ, but this is potentially opening up new and vibrant revenue streams for $COIN outside of transactions.
With that said, Transaction Revenue is still KING and makes up the majority of how $COIN make their money:
Can $COIN diversify their revenue streams? This is a risk. But for the time being, we don’t need to worry too much about decreasing transaction volumes because Crypto is SO new and SO early in the adoption S-Curve that transaction volumes probably won’t decrease.
I also love that $COIN is already thinking about expanding their revenue streams and not sitting on their golden egg. Here are a few projects their cooking up:
Coinbase Cloud
Coinbase Pro
If you’re looking to learn more about $COIN, I absolutely loved this page on $COIN’s website.
Verdict: I understand the business and like it.
Step 2: Moat and Future Growth/Catalyst
Does $COIN have a traditional MOAT? Short Answer: Not really. Long Answer: Maybe.
Let’s just started with the competition:
$COIN is not alone. There are literally hundreds of other crypto current exchanges, and here is how they rank among competitors on various indicators (see above). As you can see $COIN has a great cumulative score, but they don’t have the highest $$ volume, they don’t offer the most # of Coins, they don’t have the most Weekly Visits etc.
One thing $COIN does have is BRAND and TRUST. I think these are two leading indicators for what companies will dominate the Crytpoeconomy.
Crypto adoption is exponentially growing and you know where 1st time users are going or technology novices are going —> $COIN, because of their BRAND and TRUST. And once users get stuck on a financial platform, it’s hard to get them off (When have you tried transferring banks or canceling a credit card or changing checking accounts…never)
$COIN recently launched 24/7 Customer Support:
We announced that in Q4, Coinbase will launch 24/7 live phone and messaging support to all customers. We are continuing to invest aggressively in customer support to eliminate pain points and build a best in class customer experience - including industry leading response and resolution rates through our tech and tooling investments
This costs $$. But in my opinion it’s a huge competitive advantage moving into the future and stays true to their MISSION:
Our mission is to increase economic freedom in the world…
Everyone deserves access to financial services that can help empower them to create a better life for themselves and their families
If we REALLY want everyone to adopt Crypto, people expect Support. They expect reliability, and they expect someone available to chat when things go wrong. $COIN is meeting that expectation.
Does $COIN have growth prospects? Yes and Yes. See their optionality above.
Verdict: Pass. $COIN can become a monster.
Step 3: Management
Brian Armstrong, Co-Founder, Chief Executive Officer and Chairman of the Board, and a huge owner of $COIN. Armstrong owns around 19% of $COIN, and has surrounded himself with an excellent team.
He comes off very well in several interviews, but here are a couple
He has also written fantastic posts about the culture at $COIN and $COIN operates. Love these type of external statements from leadership and it gives me guidance that they want to win.
Verdict: Pass. Armstrong has proven he is capable at exceeding expectations and delivering performance.
Step 4: Valuation
Snapshot Numbers:
Here are the numbers (source Tikr.com):
Market Cap: ~$35B
Enterprise Value: ~$38B
Shares Outstanding: ~215B
NTM Total Enterprise Value / Revenues: 5.28x
EV / EBITDA: 11.9x
NTM Market Cap / Free Cash Flow: ~17x
Price to Sales: 5.61x
Gross Profit Margin: 100%
Current Ratio: 1.65x
The recent market crash has made $COIN increasingly more attractive. As of right now, $COIN is ~52% off of All-Time Highs. For $COIN to have a EV/EBITDA of 11.9x, and still be growing sales/revenue over +100% QoQ, this feels like VALUE. $COIN is trading at it’s lowest valuation since it’s IPO and the business fundamentals seems to be heading in the right direction.
My Story: $COIN will become the leading platform in the cryptoeconomy.
As always, I like simple math and I ran a ‘rough’ DCF with the following assumptions: a discount rate of 15%, growth rate of 15% (years 1-5) and 10% (years 6-10), and a terminal multiple of 5x. With these numbers, I got a rough range of $418- $350. If you apply a 15% Margin of Safety (on the low end) you get a rough value of ~$325 share.
Things to watch for:
$COIN’s ability to expand it’s revenue streams away from transaction fees (eventually fees will be driven to $0 - see normal brokerage fees)
$COIN’s ability to drive adoption of it’s other platform with it’s current members (i.e. Insurance companies want you to bundle, and $COIN should copy this strategy)
$COIN’s ability to disassociate itself with the volatility of the crypto market