Tokenized Assets Will Transform Markets Despite Cyber And Legal Risks

Key Takeaways

• Coinbase is uniquely positioned to dominate global digital financial services as traditional assets move onchain, unlocking new markets and exponential revenue potential.
  
• High-margin subscriptions and institutional partnerships could reshape its earnings, with Crypto-as-a-Service and tokenization driving significant expansion and recurring income.
  
• Dependence on volatile trading volumes, rising competition and fee pressure, cybersecurity issues, regulatory uncertainty, and DeFi's growth all threaten revenue stability and profitability.

Catalysts

Operates platform for crypto assets in the United States and internationally.

• While analyst consensus expects increased regulatory clarity and crypto adoption to grow Coinbase's addressable market, this may grossly understate the upside-recent developments indicate Coinbase is positioned to capture a disproportionate share of global digital financial services, and could see revenue multiply as all asset classes-equities, commodities, real estate-move onchain and the "everything exchange" vision materializes.
  
• Analyst consensus notes diversification into subscriptions and services as a stabilizing force, but this overlooks the potential for these high-margin, recurring revenue streams to dominate Coinbase's earnings mix over time as institutions, governments, and Fortune 500 firms increasingly rely on its Crypto-as-a-Service and Prime platform, significantly expanding both margins and net income.
  
• Coinbase's first-mover push into tokenized equities and real-world assets places it at the epicenter of the massive tokenization wave, enabling it to unlock entirely new markets, become a primary global capital formation platform, and drive substantial incremental revenue from brokerage, custody, and transaction fees on previously illiquid assets.
  
• The rapid rise of blockchain-native consumer applications like Base, combined with widespread adoption of onchain decentralized identity and payments, could allow Coinbase to rival or even surpass the reach of major tech giants, driving exponential growth in users, transaction volumes, and consumer engagement-based revenues.
  
• Institutional integration is only in the early innings: white-label partnerships with banks, neobanks, fintechs, and corporates globally could power a vast expansion of custody, trading, and payment flows-converting Coinbase's infrastructure into a default digital asset backbone for the world, increasing assets under custody and boosting fee-based income at unprecedented scale.

Coinbase Global Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Coinbase Global compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Coinbase Global's revenue will grow by 21.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 42.7% today to 22.0% in 3 years time.
• The bullish analysts expect earnings to reach $2.6 billion (and earnings per share of $9.31) by about August 2028, down from $2.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 69.6x on those 2028 earnings, up from 26.8x today. This future PE is greater than the current PE for the US Capital Markets industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 3.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Coinbase Global Future Earnings Per Share Growth

Risks

• Coinbase's business model remains highly dependent on trading volumes and crypto price cycles, as seen in the recent 40% drop in total trading volume and significant declines in both consumer and institutional trading revenue, making revenues and earnings highly volatile and exposed to prolonged bear markets and lower crypto asset price environments.
  
• Fee compression is an emerging risk: Coinbase noted active investments in incentives and rebates to drive market share, alongside their integration of decentralized exchanges and new payment products, which combined with intensifying competition, may further erode transaction-based revenue and net margins in the long run.
  
• Ongoing cybersecurity and data privacy concerns-highlighted by the recent $307 million data theft incident-are likely to raise ongoing compliance and security costs and could hurt Coinbase's reputation, resulting in increased operating expenses and potentially dampening user growth, both of which impact overall profitability.
  
• Legal and regulatory uncertainties persist, with several references to the need to adapt product offerings like staking, lending, and tokenized securities to evolving rules; any new adverse regulatory actions or heightened scrutiny could incur substantial legal expenses, restrict future growth avenues, or ultimately reduce revenues from certain business lines.
  
• The rapid advancement of decentralized finance (DeFi) and proliferation of decentralized exchanges-now being integrated into Coinbase's own app-threatens to disintermediate centralized platforms like Coinbase over time, potentially shrinking the relevance of its core business, compressing margins, and reducing future transaction-based revenue.

Valuation

• The assumed bullish price target for Coinbase Global is $510.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Coinbase Global's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $510.0, and the most bearish reporting a price target of just $185.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $12.0 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 69.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $297.99, the bullish analyst price target of $510.0 is 41.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.