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Dear Red Alert Reader,
Coinbase had a reference price of $250, but "shot out of the gate" at about $381 – and briefly traded above $429. After a wild day, it closed its first day at $328.28.
The upshot: You have a company whose market value temporarily exceeded $100 billion on its trading debut… and that was worth just under $86 billion at the market close.
Lotta questions here… both bullish and bearish.
But there's really only one that matters: "Should I buy Coinbase?"
For an answer – and all the "background" intelligence you need to make the decision that's right for you – I turned to the best expert I know… my friend, longtime colleague, and Money Map Press cryptocurrency expert David G. Zeiler.
Over the last several years, Dave has shared a series of Bitcoin and cryptocurrency predictions with my Private Briefing readers, many of which we've been able to share with you, too.
For the folks keeping score, virtually every single one of them has been right on the money.
Most recently, Dave told us that Bitcoin would triple in price by the end of 2021. At the time, that crypto bellwether was trading at $31,400.
Here in the middle of April, it's made a new all-time high of $64,829. So it's already halfway to Dave's target.
So let's refine that "obvious question" – refine it a bit – and pose it to Dave, asking: "Would you buy Coinbase?"
Let's drill into this… and get the whys and wherefores… so you can make the best, most profitable move…
What Every Investor Should Know About Coinbase
Editor's Note: This interview has been edited for length. Private Briefing subscribers can get the entire interview here.
William Patalon, III (Q): Welcome, Dave.
David Zeiler (A): Thanks, Bill… glad to be here… always glad to be talking with you.
WPIII (Q): So why don't we start with Coinbase itself… how about you give us the "nickel tour" on this crypto-coin player.
DZ (A): (Laughs and shakes his head) That's pretty bad, Bill… pretty bad.
WPIII: Sorry… couldn't resist, man. So… just what is Coinbase? Give us a quick overview of what the company is, what it does, and how it makes money…
DZ (A): Sure. Coinbase is a primarily a cryptocurrency exchange. Basically, it's where people can buy and sell cryptocurrencies. It caters to beginners, but also has a "pro" version with more sophisticated trading tools. Coinbase also offers custodial services to institutional buyers. It makes most of its money from transaction fees. Coinbase's custodial operation makes up just a small part of its business now, but it's growing rapidly.
WPIII (Q): And with the way crypto prices have been zooming…
DZ: (A): …all of Coinbase's horses have been at full gallop.
WPIII (Q): So it looks like the company's business is really tied to the price/value of cryptocurrencies – and the health of the crypto market.
DZ (A): Absolutely. When times are good, Coinbase will make money hand over fist. But if we get another "crypto winter" like we had in 2018 and 2019, Coinbase's business will take a hit.
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WPIII (Q): Okay, so what's the revenue-and-profits picture for the company? What's the growth look like? And let's take that forward… and talk "outlook."
DZ (A): The numbers are impressive. Revenue rose from $533.7 million in 2019 to $1.3 billion last year. On the earnings side, 2020 was when Coinbase turned profitable. It lost $30.4 million in 2019, but it raked in $409 million in profits last year. That's quite a turnaround.
But the real stunners came last week, when Coinbase announced estimated earnings for its first quarter of this year. The execs estimated revenue at $1.8 billion, which would be an 842% increase from the same quarter last year. And estimated net income was between $730 million and $800 million, multiples higher than the net income of $31.9 million in the first quarter of last year.
The problem is, that growth probably doesn't represent what investors can expect going forward. Remember, we were in the middle of a huge crypto bull run. Coinbase does have a ton of growth ahead of it, but we're going to see a lot of that come in spurts like we just saw in Q1.
WPIII (Q): A company's share price – and its "valuation" – is really tied to its prospects. How do Coinbase's prospects look to you?
And, to flesh that out, what's the competitive landscape look like?
DZ (A): In the short to medium term, Coinbase has excellent prospects. Because it wins in the ease-of-use category, it has become the biggest crypto exchange in the United States. That's why I've called it the "AOL of Crypto." So that will drive growth for some time. But it also has worthy competitors here in the U.S., namely Kraken, which is the No. 2 exchange, and Gemini, which is run by the Winklevoss twins. Over time, I think both will pose more of a challenge, especially as more people move past the "beginner" stage.
And then there are the decentralized exchanges like Uniswap. Right now, I think those are a bit too intimidating for the average investor, but that could change in the future.
WPIII (Q): The valuation is a hot topic right now – and is a focus of debate on Wall Street.
Let's start by talking about the offering itself. This wasn't a traditional initial public offering (IPO). And then let's get into the core issue: What is this company really worth?
DZ (A): Yes, Coinbase did a "direct listing" instead of an IPO. You can understand the interest, though. I mean, it's a new investment opportunity in a rapidly growing area.
WPIII (Q): And one you've been watching for a long time.
DZ (A): That's right, Bill. I've been predicting that Coinbase would be the first major crypto IPO since 2017. I'm not surprised at all by what's happening now.
Last week, I wrote a preview story – a "walkup" to the offering – that explained how analysts expected Coinbase to start trading at between $300 and $350. Nasdaq set the reference price at $250, but when it finally started trading – it was delayed until almost 1:30 p.m. – the price had jumped to $381. It got up above $400 for a while, but drifted lower for the rest of the session.
And the interest was huge.
I mean, almost 17 million shares changed hands in the first 10 minutes.
That brings us to valuation.
Now, reporters at MarketWatch did an intriguing analysis – their takeaway was that "this is worth a whole lot less than it's being valued at." Now remember, Coinbase ended its first day with a market cap of about $86 billion. MarketWatch said it should be worth less than $19 billion.
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And the sell-siders have been all over the place on this. One analyst put a target of $195 on Coinbase on March 2, and after those huge Q1 estimates, that same analyst boosted his target 125% to $440. I've seen other analyst targets of $500 and $600.
It's early, but the wide range of opinions tells me Coinbase may be shaping up as a "love it or hate it" stock like we see with Tesla Inc. (NASDAQ: TSLA).
WPIII (Q): So a "cult stock."
DZ (A): To some extent, yes.
WPIII (Q): That brings us to the "dark side" of this stock – the risks.
DZ (A): Right. There's no shortage of risks here, especially over the long term. I mean, the market is going to grow exponentially as more people start investing in cryptocurrencies. But crypto has always been loaded with risk and is very volatile. That rubs off on Coinbase, especially the risk of a major downturn in the crypto markets.
The other big risk is increasing competition. Like I said before, Coinbase already has competent rivals. Coinbase also faces competition from outfits like Robinhood, which offers about half a dozen cryptocurrencies right now. But what if one of the major brokerages decides to jump in, like Schwab or eTrade? That could be trouble.
The key thing to watch here is what happens with the fees. Coinbase charges pretty high fees and gets away with it because its ease-of-use and convenience makes those fees worthwhile. It's clearly a better experience for beginners. Coinbase has a customer base of 56 million users – that's great, but rivals will be angling to steal those folks.
And countering with lower fees is the most obvious way to do that. You know, someone comes along and starts blaring: "Free crypto trading!" I mean, maybe Coinbase and other crypto exchanges will be able to make some money by selling data on the trades to Wall Street the way the brokerages do. That would help offset the loss of the high fees. But it's hard to say how that might be received. Privacy is an even bigger deal in crypto than it is elsewhere in the financial world.
On the other hand, I think Coinbase will do very well with its custodial business. The Coinbase CEO, Brian Armstrong, told CNBC yesterday that he expects custody, debit cards, and other lines of business to make up more than half of the company's revenue within the next five to 10 years. So it's good to know they're thinking ahead on this. The custody customers in particular are mostly big investors with deep pockets and a strong need. I don't think anyone will be offering crypto custody for free.
WPIII (Q): What about some other factors. A U.S. Federal Reserve digital currency? China wanting to create a currency to displace the U.S. dollar?
DZ (A): You're talking about what's known as CBDCs, or central bank digital currencies. I do see them as inevitable, but don't see them posing a risk to crypto in general – or to a business like Coinbase. I'm pretty sure central banks will design their digital currencies to track everything you do with your money. When Bitcoin was invented, it was designed to be decentralized and anonymous – specifically to avoid the prying eyes of government. If anything, CBDCs will make cryptocurrencies more desirable.
WPIII (Q): So let's go back to my earlier question about the outlook for Bitcoin and other cryptocurrencies…
If that does play a role here… what's your latest "call" for Bitcoin?
You're great at this, Dave.
Talk about prices… predictions… ripple effects… impact.
DZ (A): Thanks, Bill.
One thing that's become clear over the past five years is that, as Bitcoin goes, so goes the rest of the crypto markets. And as the crypto markets go, so goes Coinbase's share price.
They're all linked together.
Having said that, I still see a lot of upside for Bitcoin in the near to mid term. I have moved up my prediction of $100,000 to hit by Labor Day.
WPIII (Q): Okay, Dave… the question at hand.
Would you buy Coinbase here?
If so, why?
If not, why not?
At what price… when… how would you buy this stock?
DZ (A): [Laughs… and nods] That is a good question. To be honest, I'm not a buyer of Coinbase here. The price action figures to be pretty crazy for a while. And I think it may be overvalued, but I can't even be sure about that because we just don't have enough data yet. I think the stock needs to settle a bit.
I don't necessarily have a price where I would call Coinbase a "Buy." But I will say that, if we do get a prolonged crypto winter, Coinbase will fall to the point where it starts looking very attractive. A couple more years down the road, when the crypto market goes back into bull mode, Coinbase stock will really take off.
Now I know some investors are attracted to Coinbase because they want exposure to cryptocurrencies. That's not a factor for me, as I already own a lot of crypto directly.
But those folks may want to borrow a page out of your playbook, Bill.
WPIII (Q): The "Accumulate" strategy.
DZ (A): That's right. The strategy you talk about – and employ – with lots of stocks you talk about here.
Now, again, I see risks – the risks and uncertainty I've outlined here – risks and uncertainty that argue against going "all in" and going in "big" with Coinbase right now.
The alternative is to maybe buy a very small "foundational" stake here. Then look to add to that stake only on pullbacks… and on the bigger pullbacks at that.
But do that with great caution and care.
WPIII: We'll watch for any big developments – and if they happen, we'll bring Dave back. In the related world of microcurency "altcoin" trading, Tom Gentile, our top trading expert, has uncovered an unusual crypto phenomenon where some coins can jump nearly every time Bitcoin does, but with bigger moves – 142% in 12 days, 330% in 82 days, even 1,900% higher in 62 days. Tom has details and a chart right here…