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Coinbase should not trade in lockstep with Bitcoin: analyst

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Oppenheimer senior research analyst, Owen Lau, joins Yahoo Finance to discuss his firm’s bullish call on Coinbase, and why he continues to see “a sharp dislocation” between the cryptocurrency exchange platform’s fundamentals and its valuation.

Video Transcript

- Shares of crypto exchange operator Coinbase. Trading lower here today, and they've actually fallen since their direct listing. But our next guest thinks that they are a good buy at these levels. That's Owen Lau. He's Oppenheimer Senior Research Analyst with the note today reiterating his outperform rating on Coinbase.

Owen, thanks for being here. As you point out in your note, you have a pretty optimistic revenue estimate for the company. It's set to report here in the next few weeks. And you're looking for second quarter revenue of $2.1 billion.

As you point out, that's more optimistic than the street. Where do you think that gap is? What do you see that you think other folks are not seeing when it comes to the revenue outlook here?

OWEN LAU: Right. So first of all, thank you for having me here, Judy. So to me, the difference between our estimate and the street it's number one, I mean, Coinbase still a new public company. So we still need to dig into the number, dig into the third party data source to get the right data source to-- to predict the revenue trend. In particular, the trading volume.

We felt like we have a pretty good sense and pretty good data source to predict the revenue. And that's what drives the difference between our estimate and the street. And again, like you point out that, we see a 24% upside compared to consensus for revenue, and about 11% upside in terms of earnings.

- Owen, you talk a good bit in this note about volumes coming in better than expected in the-- in the second quarter. And I would suppose moving forward. Should investors try not to-- should Coinbase be trading in lockstep with Bitcoin?

If you're focusing on volumes, do you think Coinbase just getting lumped in with the-- with the decline in crypto?

OWEN LAU: That is a very good point and that's the key point we try to make in the nook. We think Coinbase should not trade in lockstep with Bitcoin because Bitcoin can be very volatile. But at the same time, because of that volatility, it drives higher trading volume. It is similar to all the traditional exchanges.

And we think it's still a misunderstanding in the market that people think Coinbase should trade along with Bitcoin going forward. And I think it may take time for people to understand the relationships.

But when more and more quarters come out, people see the gigantic red card volume and record quarter, people would start to realize that there's a huge difference between the volatility of Bitcoin, and also the trading volume of Coinbase.

- And you know, granted Coinbase has only been trading publicly floating publicly for a few months. So that-- that will work itself out in time if indeed that break happens. But you guys have a table on here that has maybe two dozen companies that could be a comp to Coinbase depending on how you want to bucket the company. You know, merging tech, transactions, in exchange. How do you think about it at the base level? What Coinbase is today, and-- and what story they are going to be able to tell a long term about what their business is fundamentally?

OWEN LAU: Right. So that's another good point. So right now, over 80% of the revenue from Coinbase comes from trading. And that's why many people still compare Coinbase with traditional exchanges like SME Siebel, ICE, and NASDAQ.

And I think in the near term, it's fine. But the thing that strikes us it's, yeah, it's even though you can compare Coinbase with traditional exchanges. But the traditional exchanges only grow top line at about 9%. But they trade around 10 times revenue multiple.

For Coinbase, they grow it around a thousand percentage in the second quarter. Even though if you look at the next two years or so, it's still growing around 100%. But they traded that discount compared to traditional exchange. So that's one thing we see there's a huge dislocation.

Longer term, we believe that the management will add more recurring revenue. So the percentage of that transaction revenue to us, it should go down because there should be more revenue from taking, more revenue from earned campaign, and even more revenue from old coins. And that would also reduce the reliance on-- on Bitcoin.

- Owen, do you think also Coinbase needs to expand its business lines, diversify, make acquisitions? And if so, what are some areas where you think that could happen?

OWEN LAU: Yeah. So we think this is very likely that Coinbase will still grow through acquisitions. Because if they don't use the capital to do a buyback, by the way, first quarter, they had-- they generate about 50% margin. So they have a ton of cash flow.

And if they don't do a buyback, they cannot reinvest 100% of the profit into the business. Then they have excess capital to make acquisitions.

In terms of potential targets, there are like rumors out there, there are reports out there that they may buy another SM manager. I think it's possible because it can increase their recurring revenue stream. That would also help the multiple as well.

And also, another area they can go after, it's more of the technology data provider. They acquire skill that, and not sick note indicated that they can get into more of the techy data analytics, and even like-- like crypto cloud business per se.

- And Owen, lastly here, I'm just looking at your 12 to 18-month price target for $44. Or almost looking for the stock to double. If we are having the same conversation 18 months from now, how will of Coinbase reach your price target?

So I need to point out in the second half of this year, we're going to see a lot of retail adoption because Coinbase is launching their debit and credit card product. Their competitors like blowfly, voyageur, Germany are also launching similar debit and credit products.

And I think Visa's CFO mentioned in the morning that in the first six months, the crypto related purchases is about $1 billion, which is like way higher than what they had in 2019. So we see that is a potential catalyst for retail adoption.

For institutional adoption, even though we haven't heard any additional like MicroStrategy attacks or to buy more Bitcoin. But actually, in the back end, there are more and more institutions to use the underlying technology, to drive the digital assets adoption.

At the same time, there are more and more asset managers getting into this space. We have also talked to a lots of institutional investors that have been showing a lot of interest.

So to me, there are multiple catalysts that can drive the stock, that can drive the revenue, and also the current price to us-- to our price target.

- Owen, look forward to catching up with you after the report to see how this all plays out. And-- and beyond that as well, Owen, wow, as Oppenheimer Senior research analyst. Thanks, Owen.

- Thank you very much.