Coinbase's successful direct listing 'was a removal of a big risk': Analyst

Coinbase surged in its public debut yesterday. D.A. Davidson Director of Research Gil Luria joins Yahoo Finance Live to discuss.

Video transcript

ZACK GUZMAN: Well, fresh off of making history with the largest-ever direct listing in its debut, Coinbase shares are trading below where they opened, down from that $381 a share opening to just about $333 a share right now. Of course, analysts are still trying to figure out where things can go from here, given the insane ninefold growth that Coinbase was able to post in Q1 year-over-year. But will they be able to keep that up?

We have one analyst on here with us today that says that is possible and that Coinbase could hit a price target of $650 a share. And for more on that, I want to bring on the man behind it. Gil Luria is DA Davidson's Director of Research. He joins us right now. Gil, pleasure to have you on with us. I mean, yesterday, we were talking about $600 price target, Moffitt Nathanson. Talk to me about how you arrived at $650 here if Coinbase is able to keep up their momentum.

GIL LURIA: So the key is that they had a successful listing. Doing a direct listing is risky in itself, and they got a good outcome. They got a good share price, a good market cap. It stabilized. And that was a removal of a big risk. But really what I did is I said, OK, who else is in this rarefied air of hypergrowth, market-leading company.

It's maybe a handful of companies-- Zoom, Snowflake, Octa, CrowdStrike, Shopify-- these are the types of companies that have either created a category or have an open-ended growth category and they're leading in that business. That's the very exclusive club that Coinbase joined yesterday once that listing was done and the price stabilized.

And so I think they should trade in that multiple range. That multiple range, to be clear, is 25 to 70 times this year's revenue. My price target is in the middle of that range at 40 times this year's revenue for Coinbase.

AKIKO FUJITA: So, Gil, they may be in an exclusive club now, but we've seen this story before, right-- companies that sort of have the first mover advantage get new competitors into the space, they get disrupted in some way. When you look at the business model as it stands, how sustainable do you think this type of revenue is, especially when there are other competitors coming to market with lower transaction fees?

GIL LURIA: I think their competitive situation is great. But to be clear, their results are going to be far more volatile than that peer group. That peer group is mostly SaaS companies that sell subscription software. And their revenue is a lot more predictable. Crypto grows faster, but the growth is far less predictable. And so we have to state that up front.

In terms of competition, sure-- they've had competition. They have competition. They're well-positioned. They're well-positioned vis a vis PayPal and Square because they're a pure play. They're well positioned vis a vis Binance because they're regulated.

They're well-positioned versus Kraken, Gemini, and even Grayscale on the institutional side because they have such a great reputation, they've been so safe, and they're the biggest. And so they're well-positioned, but clearly in such a high growth category, there's going to be a lot of competition.

ZACK GUZMAN: What's interesting, too, is yesterday when we were talking about kind of the long-term investment thesis here, you can look at it as well, you know, when we talk about technology. And obviously, things change rather quickly-- right now, focused mostly on the retail and institutional trading fees. That's how they make their money.

But beyond it, I mean, security obviously a big question mark in the crypto space, and kind of-- that might get overlooked as well. I mean, when you look at Coinbase and what they can do long term beyond just being kind of the on-ramp exchange of choice for a lot of people out there, what other revenue streams do you maybe see developing over the next one to three to five years for a Coinbase?

GIL LURIA: Sure. So right now, there are retail broker, there are institutional broker, and then there is an exchange, which in the world of cash equity that we usually deal with is often two to three different companies. They're already in all those businesses, and there's a nice long runway for that.

But they tend to get into new revenue streams that will be, hopefully, more recurring, but also help them capitalize on the growth of the crypto economy, whether it's applications or, in the more immediate term, things like custody or staking management. Those are recurring revenue items they can sell to institutional investors that they're going to grow, in addition to applications that they put on top of crypto and on top of their other businesses.

ZACK GUZMAN: Yesterday when we were talking to Moffitt Nathanson about the potential risks here, you kind of alluded to it in that this company is clearly, obviously, very highly levered to the volatility in the crypto space, which is difficult to predict. But when you dig into maybe the historical precedentce of what we saw in the crypto winter, that last time Bitcoin prices fell 80% from peak to trough in the last cycle, and you factor that into what could happen here in Coinbase-- let's just say that plays out again, I mean, how bad could things get for Coinbase this time around if history repeats itself?

GIL LURIA: 95%-plus of the revenue is from trading commissions. If crypto assets go down a lot, if volatility goes down a lot in a crypto winter, their results will be a lot lower. That is the trade-off. The trade-off is that in good times, they'll grow 8x, 9x. This is a massive company that just grew 8 times, 9 times over last year.

When things are bad, their results will decline as well. It's-- the belief in investing in Coinbase is that over time the crypto economy is growing, crypto technology is growing-- they're very well-positioned in that. So over time, they will benefit from that growth. But absolutely, the biggest risk to the stock is that during crypto winters, their results will be a lot lower.

AKIKO FUJITA: Well, if we do hit crypto winter, we're going to have to bring you back on, Gil. Gil Luria, DA Davidson Director of Research, it's good to talk to you today.