Stock of the week - Coinbase (07.12.2023)

• Bitcoin rallied to a 20-month high this week
• Coinbase and other crypto-linked stocks gained
• Coinbase sees higher transaction revenue as cryptocurrencies rebound
• Stock looks more expensive than other exchange operators
• Share price continues to be driven by cryptocurrency market sentiment

Coinbase (COIN.US) has been one of the best performing stocks in Russell 1000, US index of 1000 largest public companies, over the past week. This should not come as a surprise given what company Coinbase is and what is happening on the cryptocurrency market. 

Bitcoin climbs to 20-month high!

Cryptocurrencies, and especially Bitcoin, has been in the center of attention as of late as digital assets enjoyed strong gains. Bitcoin trades around 17% higher month-to-date, and we are just 7 days into December! The most famous cryptocurrency climbed above $44,000 mark this week and reached the highest level in 20 months. Strong gains could also be spotted on other cryptocurrencies, with Ethereum and Dogecoin jumping 11% and 22% month-to-date higher, respectively. Solid performance of cryptocurrencies is providing a boost for crypto-linked stocks, like for example Coinbase.

Gains on the cryptocurrency market supported valuations of US crypto-linked stocks this year. Source: Bloomberg Finance LP, XTB

Coinbase's revenue is correlated with Bitcoin price

Given that Coinbase is a digital asset exchange, it should not come as a surprise that company's business performance is closely linked to the performance of digital assets, like for example Bitcoin and Ethereum. The two mentioned cryptocurrencies are especially important for Coinbase as Bitcoin and Ethereum accounted for, respectively, 38% and 19% of total trading volumes on Coinbase in Q3 2023.

Coinbase said during its Q3 earnings presentation at the beginning of November that it has generated $105 million in total transaction revenue in October 2023 as cryptocurrency prices started to rebound. To put this figure into context, it should be said that transaction revenue in the whole July - September 2023 period (Q3) stood at $289 million. While Coinbase did not announce such data for November, continued pick-up in cryptocurrency prices and news from other companies hint that it could have been a solid month as well - Robinhood Markets said that notional crypto trading volumes at its exchange were around 75% higher in November than in October.

A correlation, although not perfect, can be spotted between Bitcoin price and quarterly Coinbase revenue. Source: Bloomberg Finance LP, XTB

Coinbase is more expensive than other exchange operators

As Coinbase continues to be a loss-making company and therefore valuing it with a fundamental model, like DCF, can be a challenging task and would resolve to a lot of guessing to make assumptions. Coinbase also does not pay dividends, therefore we cannot value it using Gordon Growth Model either. However, we can try to value the company based on multiples.

Coinbase is the only listed cryptocurrency exchange so constructing a peer group can be tricky. We have decided to create a peer group has been consisting of a number of US and European exchange operators. We have calculated mean, median and cap-weighted multiples for the group and used them to value Coinbase. As one can see in the table below, each of this method leads to below-market valuation, suggesting that Coinbase is overvalued compared to the group.

Source: Bloomberg Finance LP, XTB

A look at the chart

Last but not least, let's take a look at Coinbase (COIN.US) shares performed recently. Taking a look at the D1 interval, we can see that the recent strong upward move pushed the share price above the resistance zone in the $112.50 area, marked with the 23.6% retracement of the downward impulse launched in Q4 2021. Textbook range from an upside breakout from the $47.00-112.50 range, suggests a possibility of a move towards $185 per share - a level not seen since April 2022. A key resistance zone, ranging between 50% retracement and $210 handle, can be found slightly higher. Nevertheless, traders should keep in mind that moves on Coinbase shares to a huge extent depend on the sentiment on the cryptocurrency market, as evidenced by the second chart below.

Source: xStation5

Source: xStation5