Crypto exchange Coinbase (COIN) set records Wednesday with the largest-ever direct listing as the company saw its valuation nearly hit $100 billion as shares opened for trading on the Nasdaq at $381. But one analyst tells Yahoo Finance shares could still have about 60% to climb to hit $600.
MoffettNathanson analyst Lisa Ellis explained her thesis on Yahoo Finance Live shortly before Coinbase shares began trading, calling the stock a "must-own" for any longer term growth investor.
"We are positive on the outlook for cryptocurrencies as a massively disruptive technology," she said. "Coinbase, as the only U.S.-listed large-cap stock and the market leader in the space, is really a must-own asset if you're a growth or tech oriented [investor] with a multiyear time horizon."
Interestingly, Ellis explained she arrived at a $600 price target by applying a 20-times forward multiple (in-line with other tech peers) to Coinbase's projected 2023 revenues. It also bakes in a 35% decline in crypto transactions for 2022, assuming things cool off for bitcoin relative to 2021 given its historical boom-and-bust cyclicality. Almost all expectations are that Coinbase won't be able to keep up the nine-fold, year-over-year revenue growth it was able to show in its first quarter this year as bitcoin's price surged 100% to a new all-time high, but forecasting where things go from here gets particularly interesting for evaluating Coinbase's value.
"Six-hundred [dollars per share] I know the headline sounds super bullish, but when you read our comments this one is not an easy one, it's a little bit tricky," Ellis said, noting Coinbase is unique from other tech stocks given its high correlation to volatile cryptocurrency prices. "With Coinbase, because of their tie to the crypto markets, it's going to be a bumpy ride. You have to have a strong stomach, you have to be willing to kind of gut your way through what is likely to be these peaks and valleys."
Ellis said she arrived at a 35% drop in Coinbase's trading volumes in 2022 in her model given what happened to trading in 2018, when bitcoin's price fell 80% peak-to-trough after hitting its prior all-time high in 2017.
"That's just a reference point, there's a lot of reasons why it might be less this time around because of the institutional holdings," she said, highlighting a point many advocates point to when attempting to describe why bitcoin's rise this cycle is different. "But just again for conservatism sake we're not presuming that's going to happen we're just going to wait and see, but we think you need to go into this with eyes wide open," she said.
To be fair, while Coinbase may be the largest and now first crypto exchange to go public, that doesn't mean it's without competition. That is one thing critics of Coinbase are quick to hit on, often stressing the way stock brokerages raced to the bottom to adopt commission trading, or the belief that Coinbase can't possibly keep charging high transaction fees on crypto purchases forever. For her part, Ellis thinks those critics are missing the point in overlooking the security Coinbase also offers.
"Storing crypto assets is incredibly difficult — uniquely difficult — because they are literally a digital form of cash," she said, noting that Coinbase flexes differentiated capabilities to integrate security across multiple blockchains. "That's not something that a traditional brokerage can wake up and do overnight."
Eventually, Ellis concedes that could change. But for now, Coinbase's upside seems larger than any fears around fee compression that could eventually slow the platform's revenue growth.
"That would be a little bit like saying, 'I don't want to buy Amazon in the early days because I don't think there's that much upside in book selling.' That's kind of missing the point. Coinbase's endgame is not a retail crypto brokerage it's to really become a broad technology infrastructure player across the entire ecosystem which is a much broader vision," Ellis said.
Coinbase has increasingly built out its institutional side of the business, with that segment's trading volume growing each of the last three years. Other outlets have reported that Coinbase also helped companies add bitcoin to their balance sheets, including Tesla and MicroStrategy.
Coinbase shares faded in Wednesday afternoon trade to close about 14% below its debut price of $381 a share.
Zack Guzman is an anchor for Yahoo Finance Live as well as a senior writer covering entrepreneurship, crypto, cannabis, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.