Coinbase Undervalued At 4.4x 2021 Earnings Adjusted For Underlying Asset Value

Summary Coinbase is trading at just 5.5x 2021 earnings, or 4.4x earnings when adjusting for underlying net asset value of $16.24 per share. Coinbase is taking advantage of the market's discount pricing of its bonds, executing bond repurchases at a discount on both its 2026 convertible notes and its 2031 senior notes. Q2 earnings show improvements in cost control, with a reduction in operating expenses driven by reduced headcount, G&A, and technology and development expenses. Coinbase will have increased custodial fee revenue from its surveillance sharing agreements with the 7 pending Bitcoin ETF applications, if approved. Selling puts may be an ideal entry strategy due to high premiums and implied volatility on COIN options. Coinbase Rapidly Growing but Trading at Just 5.5x 2021 Earnings, or 4.4x 2021 Earnings when Adjusting for Underlying Asset Value Coinbase ( COIN ) is a rapidly growing cryptocurrency exchange that generates revenue through transaction fees, subscription fees, custodial fees, and interest income on customer deposits. Trading volume is heavily correlated to the company's revenue and net income. While we don't have full data going back to Coinbase's founding years as a private company, we do have trading volume and earnings since 2019. 2019 2020 2021 2022 2023 Annualized Trading Volume $79.9B $193.1B $1.671T $830B $474B YoY Change +142% +765% -50% -43% Net Income -$30.4M $329.3M $3.61B -$2.66B -$353M Source: Coinbase SEC Filings 2021 showed the long-term profitability potential of Coinbase with earnings of $3.61B in net income, or $14.50 per share. With Coinbase now trading at $80 per share, there is now an opportunity to purchase Coinbase shares at 5.5x 2021 earnings. Additionally, Coinbase has a strong balance sheet with a net asset value of $16.24 per share. Subtracting out the underlying net asset value, the business is trading for just 4.4x 2021 earnings. This is a compelling valuation from a rapidly growing business if you think that Coinbase will achieve similar or stronger earnings in the next cryptocurrency bull market. Coinbase Net Asset Value/Liquidation Value Cash and Cash Equivalents $5.17B Restricted Cash $20.7M USDC $315.5M Market Value of Crypto Assets Held $760.9M Total Assets Excluding Custodial and Customer Assets $6.27B Crypto Asset Borrowings $144.5M Market Value of Debt w/ Current Bond Prices $2.315B Total Debt Excluding Custodial and Customer Assets $2.459B Net Asset Value ((NAV)) $3.81B NAV per share $16.24 Market Value of Debt Affected By Discounted Bond Valuations Bond Principal Amount Bond Price Market Value of Debt 2026 Convertible $1.373B $70.24 $964.4M 2028 Senior $1B $72.13 $721.3M 2031 Senior $1B $62.87 $628.7M Total $3.373B $2.315B These discounted bonds and their subsequent impact on the market value of Coinbase's debt then translate into Coinbase's net asset value. Coinbase Opportunistic Bond Repurchases With Coinbase bonds trading at substantial discounts to par value, Coinbase is executing bond repurchases to take advantage of the discount, with $45.5M of 2026 convertible note repurchases at an average 29% discount to par. Additionally, Coinbase announced on 8/7 its tender offer for $150M of its 2031 Senior Notes, at $615 per $1,000 of principal amount, with an additional $30 in early tender premium, representing a discount to par of 35.5% to 38.5%. These discounted bonds also affect the market value of the company's debt, with a total principal amount of debt noted on the balance sheet as $3.373B versus $2.315B in market value of debt given the current bond prices. Market value of debt is as follows. Q2 Earnings Show Continuing Improvements in Cost Control Despite record profits in 2021, Coinbase allowed operating costs to balloon to an unsustainable level of $4.76B, up 481% from 2020 operating expenses of $868.5M. Operating expenses increased once again in 2022, by 24% up to $5.9B. Results in Q1 and Q2 of 2023 show that Coinbase is increasing its financial discipline and cutting costs, with annualized H1 2023 costs at $3.35B, down 43% from 2022. 2020 2021 2022 H1 2023 Annualized Operating Expenses $868.5M $4.76B $5.9B $3.35B YoY Change +481% +24% -43% Source: Coinbase SEC Filings and Shareholder Letter Q2 earnings showed an improvement on Q1 of 2023, with a 13% Quarter-over-quarter reduction in operating expenses from $896.4M to $781.5M. Drivers of improvement include Technology & Development expenses, down by $288.5M on a quarterly basis since Q2' 22, representing a $1.15B decrease on an annualized basis. General & Administrative expenses are also down by $211.2M on a quarterly basis since Q2' 22, representing a $844.8M on an annualized basis. This is in light of a decrease in operational bloat via layoffs, with full-time employees down 31.5% from 4,977 in Q2'22 to 3,406 in Q2'23. Coinbase Shareholder Letter If Coinbase can maintain this level of financial discipline going into the next bull market, it can likely blow past its 2021 earnings if/when trading volume picks back up. Cryptocurrency Bull Market Forecasted to Return 2024-2025 based on 12-Year Pattern As outlined in my previous Bitcoin ( BTC-USD ) article , Bitcoin has followed very clear 4-year cycles throughout its 12-year history, with 3 years up followed by 1 year down. These returns are displayed below. Bitcoin Returns by Calendar Year Year Return 2011 1467% 2012 187% 2013 5870% 2014 -61% 2015 35% 2016 124% 2017 1338% 2018 -73% 2019 94% 2020 302% 2021 60% 2022 -64% 2023 YTD 75% Source: Bankrate Bitcoin Price History If this pattern continues, we would expect the Bitcoin bull run to pick up in 2024 and 2025. This would likely correspond with an increase in trading volume, transaction fees, and earnings for Coinbase, along with an increase in value in their cryptocurrency held for investment. Coinbase Surveillance Sharing Agreements Means Potential Increase in Custodial Fees News has come out of recent various BTC ETF applications from BlackRock, WisdomTree, Fidelity, Invesco, Valkyrie Investments, Ark Invest, and VanEck. An integral part of all these applications is their surveillance-sharing agreements with Coinbase . The SEC deems these surveillance sharing agreements necessary in order to curtail the possibility of market manipulation.