Coinbase shares close 14% below opening price after trading debut
Coinbase Global (COIN) shares ended their first day of trading at $328.28 apiece, falling below their opening price of $381.
Coinbase's closing level gave the stock a fully diluted valuation of nearly $86 billion. Earlier, in the day, the stock's valuation easily exceeded $100 billion, with shares rising to as much as $429.54 in the minutes immediately following its opening trade.
The stock was given a reference price of $250 per share on the Nasdaq on Tuesday, though no shares traded hands at that price. Coinbase's direct listing differed from a traditional initial public offering in that no new shares were issued in the process, with existing shareholders instead directly selling the stock to the public.
Coinbase, the largest cryptocurrency exchange in the U.S., hit the public markets amid a record-setting rally in cryptocurrency prices and broadening adoption of digital assets. The public debut was one of the most highly anticipated in the U.S. this year, with public and institutional interest in cryptocurrencies swelling in recent months. Companies including Tesla (TSLA), Square (SQ), BNY Mellon (BNY) and PayPal (PYPL) have either added significant holdings of bitcoin to their balance sheets or begun facilitating transactions in cryptocurrencies, and legacy banks Morgan Stanley (MS) and Goldman Sachs (GS) recently announced they would begin offering bitcoin exposure to their wealth management clients.
"Coinbase is a foundational piece of the crypto ecosystem and is a barometer for the growing mainstream adoption of bitcoin and crypto for the coming years in our opinion," Wedbush analyst Dan Ives wrote in a note. "Given the still nascent and volatile nature around Bitcoin we believe less than 5% of public companies will head down the Bitcoin investment path in some capacity over the next 12 to 18 months, but could move markedly higher as more regulation and acceptance of this currency takes hold further down the road."
Bitcoin prices reached a record high of more than $64,000 on Wednesday, and comprise most of the total cryptocurrency market capitalization of over $2 trillion. The boom in demand for digitally native, non-interchangeable assets has been further underscored by the rise in non fungible tokens (NFTs) in the digital art and collectibles world, most of which have been built on the ethereum blockchain.
"Crypto has the potential to be as revolutionary and widely adopted as the internet. The unique properties of crypto assets naturally position them as digital alternatives to store of value analogs such as gold, enable the creation of an internet-based financial system, and provide a development platform for applications that are unimaginable today," Coinbase said in its prospectus. "These markets and asset classes collectively represent hundreds of trillions of dollars of value today."
Coinbase, for its part, makes the vast majority of its money via transaction fees from trades on its platform by retail and institutional users. Revenue for the year ended Dec. 31 more than doubled to $1.3 billion. On the bottom line, Coinbase swung to a profit of $322.3 million for the full year 2020, versus a net loss of $30.4 million in 2019. More than 43 million retail users and 7,000 institutions use the Coinbase platform, the company added.
For the first quarter of fiscal 2021, Coinbase estimated it would post net income of between $730 million and $800 million, compared to net income of just $32.26 million in the first three months of 2020.
'Will be worth more than Goldman Sachs'
Even staunch cryptocurrency proponents, however, have noted that Coinbase's recent, rapidly growing results could be subject to volatility due to competition and price changes in digital assets.
"The biggest risk here is that 90% of Coinbase’s revenue is still tied to retail trading volume. And it’s very expensive — 250 basis points in transaction fees on average on those retail users, that’s expensive. So I think there’s going to be margin compression and challenges to Coinbase’s business model," Meltem Demirors, chief strategy officer at digital asset investment firm CoinShares, told Yahoo Finance. "Their margin is someone else’s opportunity, and already we see competitors in the space that are offering the same service, albeit with smaller brands, at much better prices."
Coinbase's results would also be subject to fluctuations in notoriously volatile cryptocurrency prices, which tend to dictate retail investor interest in cryptocurrencies overall, Demirors added.
"Historically, bitcoin in particular has gone through these two to three year cycles where we see a period of tremendous expansion and growth and then we see a 30% to 40% correction, sometimes even greater," she said. "So the risk here is Coinbase could have some of that same volatility that bitcoin and other digital assets have historically had."
Still, the opportunity for growth remains significant for cryptocurrencies and for Coinbase, Demirors maintained.
"I firmly believe within the week it will be worth more than Goldman Sachs," Demirors said. "Goldman today employs 40,000 people. It was founded in 1869, $120 billion market cap. Coinbase, founded in 2013, employs less than 4,000 people, and it's going to have a bigger market cap. So again, what I think we're watching here is a new guard coming in. And frankly, if financial institutions don't start to pay attention to this and take notice and build things that their clients want, their clients are going to leave."
At the same time, however, Coinbase's elevated valuation has given some investors pause. The stock already easily surpassed the $100 billion mark during intraday trading on Wednesday.
"Really to be comfortable buying at this price, you really have to have a strong belief, firm conviction, that cryptocurrency is the way of the future and that it’s going to be a long-term, sustainable trend," Bankrate.com's Jim Royal told Yahoo Finance. "But of course, you’re also betting on, at least to some extent, the continued rise in price of major cryptos such as bitcoin [and] ethereum raising increased trading volume ... And so those are really key drivers to the success of Coinbase.”
However, a number of investors are still on the sidelines when it comes to investing in bitcoin and other cryptocurrencies. In Bank of America's latest April global fund manager's survey, the firm found that 74% of respondents answered "yes" when asked whether they believed bitcoin was in a bubble, compared to just 7% of respondents who gave the same answer about equities.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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