i don't see why anyone would want to buy coinbase stock. it's extremely correlated to the broader crypto market with less upside. In a bull market, you could buy bitcoin or maybe be a bit more risky and buy some of the higher tier alt-coins and it would probably give you a 1.00 correlation in bull and bear cycles, but during the bull cycles the coins would skyrocket because they are tied to any major fundamental metrics like balance sheets.
> i don't see why anyone would want to buy coinbase stock.
Because their growth trajectory is insane. They are making a ridiculous amount of money & will be around for a long time. The real question is how MUCH should you pay for the stock? It's worth something, but I haven't tried to value it & I have no idea what it's worth. More than zero, less than infinity.
> but I haven't tried to value it & I have no idea what it's worth. More than zero, less than infinity.
Thankfully a lot of people do know how to price the value of a stock. A good number to target is a P/E ratio of 30 for a tech stock in growth mode.
Tomorrow COIN releases their earnings report. EPS is expected to be 0.17% of the share price. So I would expect the blood bath to continue on COIN stock. If I had money available, I would buy put options tomorrow on COIN.
That's a really rough valuation heuristic that can lead you very far askew.
A P/E of 30 is appropriate for a value stock (steady earnings) at 3% interest rates. (How did I get that figure? P/E of 30 is about a 3% earnings yield, and if earnings are steady the stock is effectively equivalent to a bond at that rate.)
For a growth stock, you have to ask yourself "How much growth do I believe is left in this market?" A company that's growing at 20% annually but has only a year left before it plateaus (like FB or NFLX last year) should trade at about a 20% premium; that'd imply a P/E of 35. But a company that's growing at 20% annually and has a decade of growth left (like FB at IPO) should trade at about 6x that original multiple, for a P/E of 180. An earnings yield of 0.17% implies a P/E of about 600, which implies that earnings should grow 20x before the company reaches a steady state. That's a little high but not totally out of the ballpark for Coinbase (earnings: $3B, market cap $21B) if you assume its comps are companies like Bank of America (earnings: $32B, market cap $293B) or J.P. Morgan Chase (earnings: $48B, market cap $363B).
Also note the effect of interest rates on valuation. At 10% rates, a value stock should have a P/E of about 10. For a growth stock, the effect is much more pronounced, because in the decade that it takes for the company to start raking in serious cash, that bond will be worth 2.6x as much and the company's long-term earnings need to be discounted accordingly, on top of the lower steady-state P/E. That's the real reason why tech growth stocks shot up so high after the pandemic and now have crashed so hard. With higher rates, large cash flows in the future are worth relatively less because you can earn more with safe investments now.
P/E ratios have been pretty insane lately and just came back down to earth and I think your right that interest rates have a lot to do with stock price valuation of growth stocks but it’s not just growth stocks taking a beating right now. Why not grab a safe 3% return investment instead of a risky 6% return investment - or if both are 10% in your example I wouldn’t even consider that a value stock because it would be riskier with no reward. Of course a lot of the growth stocks have negative eps so near impossible to use this measure.
It's all dependent on interest rates, because that sets the discount rate that all investments are compared to.
A P/E of 30 is an earnings yield of about 3% (1/30). A steady cash-flowing stock will compare favorably to any bond with an interest rate of < 3%. When bonds are yielding < 3%, that's a good deal.
A P/E of 15 is an earnings yield of about 6% and change. When rates are in the 6% range, this is fairly valued.
A P/E of 6-10, like what was considered good in the late 70s, is an earnings yield of 10-18%. Sure enough, in the late 70s when you could actually get these P/Es, interest rates were around 18%.
There's math behind these rules of thumb. It all comes down to discounted cash flow analysis - if you understand the inputs that go into that formula, what the market does makes a lot more sense.
Except that's not how the markets work. Historically the PE ratios were much lower and the rates were much higher. Your model doesn't even work 5 years ago.
and when the gold rush is over, the shovel seller also goes out of business. Therefore, the shovel seller ought to sell their business _before_ the gold rush is over! Or find another use for shovels - unfortunately, i don't think there's much use for shovels outside of shovelling gold.
Tell that to Levi's, Wells Fargo, American Express, Armour Meatpacking, Studebaker motors, Ghirardelli chocolates, and Mark Twain, all of which got their start in the California gold rush.
Coinbase is in just a weird no man's land. If your bull case for crypto is replacing the US dollar as the world's dominant currency, why wouldn't some exchange in a regulation-free tax haven come to dominate, rather than a US corp?
I disagree. The purpose of a crypto exchange is to exchange crypto for national currency. This requires interaction with national banks because banks are the only entities that can hold national currency in digital form. E.g. to hold USD you need a correspondent bank in the US somewhere.
Bitfinex, which is incorporated in the Cayman Islands, is an example of your “ideal” bank. It has seen its US correspondent banks flee several times, leaving Bitfinex users unable to withdraw USD.
Coinbase is a US regulated exchange which US banks are much more willing to cooperate with since they perceive it as safer than working with some Cayman Island outfit.
The implication is that when crypto goes sideways, trading volumes drop, and thus, even though spread might be same or even better, the volume drop will have lost them money.
