Here’s the low-down on the Coinbase IPO
Yesterday, Coinbase (NASDAQ:COIN) went public via its highly anticipated initial public offering (IPO). Shares traded as much as 72% higher in early morning trading, as investors heavily piled into the Coinbase offering.
Indeed, these absolutely incredible returns were largely expected. Bitcoin (CCC:BTC-USD) prices continue to remain elevated at nearly $63,000, and investors are starting to see the value in blockchain technology and the tokens that trade on these virtual ledgers.
Accordingly, yesterday, shares of other decentralized exchanges traded higher on the news. One such example is Balancer’s (CCC:BAL-USD) token, which saw double-digit gains on the news. Indeed, investors appear to be repricing such securities on the heels of what can only be described as a victory for cryptocurrency investors.
Here’s more on what transpired yesterday.
Coinbase IPO Blows Away Investor Expectations
Coinbase was founded in 2012 by Brian Armstrong and Fred Ehrsam. The company has grown to an incredible size, with more than 1,000 employees and operations in over 100 countries.
It’s a broad play on crypto at a time when cryptocurrency investing is all the rage. Indeed, investors in Coinbase appear to be largely viewing this trade as a way to invest in all cryptocurrencies. The greater the overall rise in cryptocurrency prices, the greater the interest, and therefore trading volumes on such platforms. Investors are banking on the fact that Coinbase will indirectly benefit from a rising tide in this sector.
Many investors have noted shock at the $100 billion valuation. While some believe the value of Coinbase is entirely sentiment-driven and detached from the fundamentals of the business or reality, others seem to think it’s a validation of the crypto space.
I can understand both sides of the coin.
Yes, there’s a real argument to be made that cryptocurrencies are real. A $100 billion valuation speaks to this.
However, it’s important to remember than Coinbase earned $322 million in 2020. Coinbase’s valuation of $86.8 billion as of market close yesterday implies a trailing price/sales (P/S) multiple of 270. That’s extremely steep.
Now, the company has been estimated to have earned between $730 million and $800 million this past quarter alone. That kind of earnings growth is built into this valuation. But, even projecting these numbers forward for 2021, $3.2 billion in earnings (four quarters at the high end of this past quarter’s range) would still imply a P/S multiple of 27.
Direct Listing the Path of Choice
Coinbase went public via a direct listing and is one of many such companies to choose this path. Direct listings allow for a speedier listing process, is less costly in terms of deal fees and doesn’t dilute the company’s stock like a typical IPO would. For companies like Coinbase with extreme investor demand, getting to market sooner than later is the goal.
That said, direct listings can often be the cause of additional volatility for investors immediately following the IPO. If yesterday’s market movements are indicative of what’s in store for investors in COIN stock, there’s nothing to fear. However, increased volatility can exist over the near term for the following reasons.
First, a direct listing involves the sale of shares held by insiders only. No new shares are issued, and the company doesn’t typically receive proceeds from these transactions. It’s a way for insiders to capitalize on the seed investments they’ve made over the years.
Accordingly, supply and demand comes into play here. If insiders decide to hold — or sell — prices can fluctuate greatly. These insiders tend to have large chunks of shares, so the price can often be determined by how optimistic or pessimistic insiders are in the future of said company. Right now, it appears optimism is winning out. But that all can change.
It appears there’s no lock-up period with this stock, and all shares are free-trading right now. So, that’s good for investors. However, knowing that insiders could sell large chunks of shares at once is a risk investors are taking with this stock right now.
If the market remains red-hot, there’s likely nothing to worry about. However, it’s a risk to be considered today.
Coinbase IPO: Conclusion
The Coinbase IPO went better than I expected it would yesterday.
If the crypto trade remains red-hot and growth accelerates for Coinbase, anything’s possible. But investors are clearly on the edge of their seats with respect to how this stock will trade in the coming days.
Personally, I’m eagerly watching from the sidelines on this one.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
Note: The article originally appeared at ValueWalk. It was contributed by Chris MacDonald, InvestorPlace.