In brief
- Based on private trading of shares ahead of its direct listing, Coinbase is valued at as much as $100 billion.
- David Trainer, CEO of stock research firm New Constructs, argues that valuation is too high.
Coinbase’s current rumored valuation of approximately $100 billion is “too high."
That's the verdict of Wall Street veteran David Trainer, CEO of stock research firm New Constructs.
Ahead of its upcoming direct listing, private trading of Coinbase shares has indicated an implied market value for the cryptocurrency exchange as high as $100 billion. Trainer told Decrypt that with increasing competition in the cryptocurrency market, neither Coinbase’s current market share, nor its margins, look sustainable in a cryptocurrency market that will continue to mature into the future.
Instead, he argued, Coinbase’s valuation is based on sentiment, rather than fundamental analysis. “I think Wall Street doesn’t want people to have any accurate form of price discovery other than greater fool theory that allows them to sell assets, especially in bubble times at prices that are disconnected to their underlying fundamentals,” Trainer told Decrypt.
Coinbase's profitable year
According to a report published by New Constructs, Coinbase stands out against recent IPOs (initial public offerings) because the company actually generated a profit in the last financial year.
Citing Bloomberg, the report notes that 85% of companies that went public last year were unprofitable. However, Coinbase’s $322 million profit—as shown in its recent S-1 filing—has generated a wave of investor positivity around the company, and the stock.
But according to Trainer, bullishness about the broader crypto industry—in which Coinbase plays a substantial role—has fueled sentiment about the company’s stock that is largely unfounded.
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“As long as Wall Street can get you going on the sentiment, as long as you stay focused on the drug high, you don’t have to worry about the drug down,” he said.
What’s more, Trainer suggested this kind of bubble has occurred before, in industries including airlines and automobile manufacturing. “There was great fanfare and overvaluation of lots of companies in the beginning of those inventions, but in the end, precious few even survived and the actual valuations came way down,” he said. And just like those markets, which were once in their infancy, the crypto exchange market has yet to mature.
A maturing crypto market
According to Trainer, stock prices inevitably align with the costs of their competitors when they inhabit a mature market—what the cryptocurrency exchange market currently is not.
In the New Constructs report, investors are advised not to buy Coinbase stock “anywhere close to the rumored levels.”
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Coinbase, the biggest US cryptocurrency exchange, posted its S-1 filing on Thursday morning ahead of its upcoming milestone direct listing on the Nasdaq. The filing revealed $322 million in profit in 2020 compared to a loss of $30 million in 2019, stark proof of how well Coinbase has fared from the recent Bitcoin bull run, and numbers that are sure to strengthen the appeal of COIN shares when they debut. The S-1 filing is also a chance for the public to get a look under the hood of a still-priv...
Trainer may not be bullish on Coinbase stock, but he did say there is a distinction to be made between stocks and companies.
According to Trainer, there is no evidence to suggest Coinbase’s current valuation will be there forever. “There is a difference between a good company and a good stock,” Trainer said, adding that there is nothing in the current makeup of the company that suggests they have some secret technological advantage that will allow it to stay ahead of its competitors.
Of course, those competitors—which include Kraken, Binance, Gemini and Bitstamp—are watching Coinbase’s listing with keen interest. “They’re reading the S-1, just like every other private equity firm in the world, they see the profits and they’re going to want to get a piece,” said Trainer.
