Coinbase's $100 billion valuation should be about 80% lower, New Constructs CEO says

• New Constructs CEO David Trainer said his calculations point to a valuation of $18.9 billion for Coinbase, well below the estimated $100 billion.
• Coinbase is set for a direct listing on the Nasdaq on April 14.
• Coinbase faces the risk of competitors driving down their fees in the young cryptocurrency market.

The potential $100 billion valuation of Coinbase Global ahead of the cryptocurrency exchange's trading debut is "ridiculously high," said New Constructs CEO David Trainer, with an outline from the veteran stock analyst including his view that the company's profitability faces the risk of being slashed.

Coinbase is set for a direct listing on the Nasdaq exchange on April 14. This week, the San Francisco-based company estimated a more than 800% jump in first-quarter revenue to $1.8 billion from a year earlier but noted that it is "very difficult to accurately forecast" revenue going forward because of market volatility.

"Even though Coinbase's revenue surged over the past 12 months, the company has little-to-no chance of meeting the future profit expectations that are baked into its ridiculously high expected valuation of $100 billion," said Trainer in a research note from New Constructs released Friday.

Coinbase is currently the largest cryptocurrency exchange in the US by revenue, and its platform offers access to Bitcoin, Ethereum, and Litecoin, among other digital currencies.

Coinbase is a standout among companies with recent IPOs because it makes a profit, said Trainer, with core earnings rising to $317 million from about $17 million in 2020 year-over-year.

But overall, Trainer said his "calculations suggest Coinbase's valuation should be closer to $18.9 billion -- an 81% decrease from the $100 billion expected valuation."

Among Coinbase's risks is competition as the cryptocurrency market matures, and that could lead to transaction margins at the company to fall "precipitously."

He pointed to sharp competition in late 2019 between brokerages over stock-trading fees and said such a "race-to-the-bottom phenomenon" is likely to emerge among cryptocurrency exchanges.

"Competitors such as Gemini, Bitstamp, Kraken, Binance, and others will likely offer lower or zero trading fees as a strategy to take market share," he said. Also, if traditional brokerages begin offering customers the ability to trade cryptocurrencies, that would "most certainly cut down on the unnaturally wide spreads in the immature cryptocurrency market."

He said, for example, if Coinbase's revenue share of trading volume fell to 0.01%, which is equal to traditional stock exchanges, its estimated transaction revenue in the first quarter of 2021 would have been just $35 million, instead of the estimated $1.5 billion.

"The crypto markets are very young and we expect many more companies to compete for the profits Coinbase enjoys today," Trainer said.