Coinbase Global (NASDAQ:COIN), the huge cryptocurrency exchange, just reported blowout quarterly results for the second quarter on Aug. 10. Its revenue, net income and free cash flow (FCF) were all significantly higher not only from a year ago but also over the last quarter. As a result, Coinbase is gushing out cash, and the value of COIN stock, despite what analysts think, is significantly higher.
My best estimate is that it’s worth $418, or 63% higher than today’s price of $256.83 (as of Monday’s close). Analysts are with me on this assessment. Many of them have even higher price targets.
For example, 17 sell-side analysts surveyed by Refinitiv, and published by Yahoo! Finance now think COIN stock is worth $370.67. That represents a 44% potential gain over today’s price. Analysts covered by Seeking Alpha reports have an average price target of $329.98, or 28.5% over today’s price.
Let’s look at why Coinbase Global is worth so much more.
Coinbase’s Blowout Financials
It turns out that volatility is good for a crypto exchange. In Q2 Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) soared to peaks in April and May, turned down violently in May and then started a rebound. This is all very good for business.
For example, Coinbase’s net revenue skyrocketed to $2.033 billion, up from $178 million a year ago, but more importantly 27.3% over its Q1 sales. Its amazing growth path can be seen in a table at the bottom of page 2 of the shareholder letter. At that rate, it’s on a glide path to rise 163% on a compound basis over the next year.
But even more amazing, Coinbase produced $7.394 billion in free cash flow (FCF) during its first six months of 2021. That can be seen on page 23 of its letter. What shocked me was that this was 83.5% higher than its six-months’ revenue of $4.029 billion as seen on page 22. This is amazing, and I have never seen that before. How could that be?
After looking at the situation more closely I found that this was due to a one-time $5.1 billion increase in funds from customers due to the company’s huge increase in users. So, normalizing the FCF performance brings it down to $2.293 billion.
In addition, the company’s tax rate showed a benefit of $1.249 billion, which also has to be backed out. That lowers its normalized FCF to $1.044 billion. This brings its FCF margin down to 25.9% (i.e., 1.044 billion/$4.029 billion). Moreover, we really should take out taxes, so that will lower its normalized FCF margin to 20.7% (i.e., 80% of 25.9%). For simplicity’s sake, let’s use a 20% FCF margin on a normalized basis.
Forecasting FCF and Target Price for Coinbase
Next year, 16 analysts surveyed by Refinitiv (Yahoo! Finance) estimate revenue will hit $5.67 billion. Seeking Alpha reports that 19 analysts forecast $6.01 billion. So, on average their forecast is for $5.84 billion. Applying a 20% margin on that number results in a normalized FCF figure of $1.168 billion.
Here is how we can use that to value COIN stock. First, we can say that a company with this kind of growth would normally have an FCF yield (i.e., FCF divided by its market cap) of 1%. So dividing $1.168 billion by 1% results in a target market value of $116.8 billion. That is 73.6% over today’s market value of $67.264 billion, according to Yahoo! Finance, which I have found has the best market cap calculations.
Even if we used a 1.5% FCF yield, the target market value would be $77.867 billion, or 15.8%. In other words, the value of COIN stock is worth somewhere between 15.8% and 73.6% higher. The mid-point would be +44.7%, but I think it should be skewed towards the higher end, or 60% higher (i.e. 70% skewed rather than 50%).
That means that COIN stock is worth 63% more than $256.83 as of Aug. 13, or $418 per share.
What To Do With COIN Stock
My guess is that, despite analysts’ forecast of lower revenue next year, mainly due to competition and lower fees, the exact opposite will happen. In fact, I expect that at some point there will be a buying panic with COIN stock as analysts begin to raise their revenue, net income, and FCF targets.
So I am going to stick with my target price which is higher than many other analysts. I suspect that this will be a case much like Tesla (NASDAQ:TSLA) where analysts will be dragged kicking and screaming into the higher valuation targets. Regular investors who actually buy and sell cryptos, especially if inflation gets out of control, which could easily happen, will increase Coinbase’s trading base. COIN stock is likely to soar another 60% over the next year.
On the date of publication, Mark R. Hake holds a long position in Bitcoin and Ethereum but did not hold any position in any other security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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