The Long Term Investor

Interesting little data point. So far in March 2021 there have been 11 market days. Of those 11 days......7 have been positive for the SP500 and 4 Have been negative. I suspect that the average person....would have a much more negative view of the recent markets including the SP500. The past 5 market days including today....have ALL been positive for the SP500 with a five day gain....including today of.......3.63%. Year to date as of this moment........for the SP500........+5.41%.

 

So we are NOW closed for the day in the markets. DOW, NASDAQ, and the SP500 are ALL nicely positive for the day. The DOW and the SP500.......BOTH.......ended at....all time record highs. NICE news for those that are actually invested in the markets........and.....for long term investors.

Stock market news live updates: Dow bounces off fresh record but tech rebounds; AMC roars

https://finance.yahoo.com/news/stock-market-news-live-updates-march-15-2021-231228213-114929220.html

(BOLD is my opinion OR what I consider important content)

"Wall Street benchmarks rose in late trading on Monday, with the broader market setting marginal new highs and technology shares attempting to recover lost ground, as investors struggled to balance the rally against steadily rising Treasury yields.

On Friday, major benchmarks ended a mixed session with the Dow Jones Industrial Average jumping by nearly 300 points and the S&P 500 Index also inching to a new high, bolstered by the signing of a new $1.9 trillion stimulus bill that's poised to spur consumer spending and ignite economic growth. Most Americans are poised to receive $1,400 stimulus checks, which began arriving over the weekend.

Still, Washington's aggressive spending spree, and super-accomodative monetary policy, has focused growing attention on runaway deficit spending — which is at least part of the reason why government borrowing costs have begun to spike, even as the Federal Reserve remains committed to fostering growth through lower yields and higher inflation.

Last week, the benchmark 10-year Treasury yield spiked to a pre-pandemic high around 1.6%, up about 50 basis points in a month. Another warning sign has emerged via Bitcoin (BTC-USD), where prices over the weekend topped $60,000, a new record high before paring those gains Monday.

In a note to clients on Monday, analysts at Oppenheimer underscored that "government bond prices tend to suffer as economies exit a recession, while equities tend to benefit from an improvement in economic growth that is expected in a recovery, and which can be reflected in revenue (sales) and earnings (profit) growth for businesses."

The firm added: "As the exit process from the pandemic moves ahead notwithstanding normal speed bumps and setbacks typical when exiting a major crisis—more will be revealed as to how efficient or inefficient the latest tranche of rescue stimulus will be in getting the economy over the hurdles that lie ahead."

On Friday, Goldman Sachs economists projected that the fiscal rescue package would give the economy even greater impetus in 2021, estimating gross domestic product would expand by 6% in the first quarter. For that reason, markets will closely watch remarks this week from Fed Chair Jerome Powell for hints about whether the central bank is growing concerned about moves in the bond market, and an economy that could overheat.

However, Goldman noted that "Fed officials are unlikely to see much of a problem [with rising rates] at a time when financial conditions remain easy, activity is picking up, and powerful growth impulses are set to support the economy all year."

Meanwhile, technology stocks have underperformed the broader market, as the gradual reopening of states and localities — and a COVID-19 mass vaccination effort that's gathering steam — has encouraged investors to rotate out of so-called "stay at home" trades favoring big names like Amazon (AMZN), Netflix (NFLX), Apple (AAPL) and Facebook (FB). Soaring interest rates has amplified volatility across the tech sector, amid expectations of higher borrowing costs weighing on growth companies.

On the vaccine front, President Joe Biden announced that around 100 million people will have been vaccinated against COVID-19 in the next few days. The news contrasted sharply against events in Europe, where the continent's mass inoculation efforts have been hampered by supply and execution issues. On Monday, Germany, France and Italy all paused their use of AstraZeneca's (AZN) vaccine, on concerns it could be tied to blood clots.

—

4:02 p.m. ET: Dow, S&P end at new records in whipsaw session, tech stocks rebound
Here were the main moves in markets as of 4:02 p.m. ET:

• S&P 500 (^GSPC): +25.43 (+0.64%) to 3,968.77
  
• Dow (^DJI): +173.64 (+0.53%) to 32,952.28
  
• Nasdaq (^IXIC): +139.84 (+1.05%) to 13,459.71
  
• Crude (CL=F): -$0.27 (-0.41%) to $65.34 a barrel
  
• Gold (GC=F): +$9.50 (+0.55%) to $1,729.30 per ounce
  
• 10-year Treasury (^TNX): -2.8 bps to yield 1.6070%"

MY COMMENT

WOW....a couple of......NEW........BOGGIEMEN in this little article. ONE new one is the.......rise in Bitcoin......and another new one is.........the threat of the DEFICIT.

AND.....we see the continuation of the characterization of the Ten Year Yield as a.........(GASP).......SURGE in interest rates. YEAH right.....it has surged up to a little bit higher in the range of the LOWEST ten year yields in the past......100 years.

Actually I am too lazy to look it up.....but.....I am confident that the Ten year yield is STILL currently in the EXTREME low end of the range of the past 41 years of stock investing. INTERESTING....that it did not seem to matter in the slightest when you look at the long term gains for investors over the past 41 years.

THE power of long term investing......you get to simply IGNORE all the short term DRAMA and FEAR MONGERING.

 

YES......my kind of day. VERY nicely green in the old account today. Eight of eleven holdings positive with Amazon, Microsoft and Costco being.......very, very, slightly.....negative. On top of that....I got a good beat of the SP500 by 1.40%.

As i said a few posts above.....the entire month of March so far is nicely positive.

I posted a bunch of "calculators" a few pages back including the SP500 calculator for returns with reinvestment of dividends. For the past.........2.5 YEARS....since this thread started the results are:

"Lets say I wanted to see what the SP500 had done since this thread was started in October of 2018. I put in the data and........out pops the following info:

Total SP500 return (without dividends) +39.418%
Annualized SP500 return (no dividends) +15.306%
Total SP500 returns with dividends reinvested +45.285%
Annualized SP500 return with dividends reinvested +17.361%"

NOW.....2.5 years....that is approaching.....long term investing. I consider long term investing.....personally to be anywhere from 3 years on forward. If I remember I will calculate the same data as above for the SP500 on the three year anniversary of this thread in October 2021.

With ALL we have gone through over the past 2.5 years......looks like the investors that have a long term focus are STILL showing an........ANNUALIZED RETURN.....of 17.361%......with dividends reinvested.......assuming that they are close to the return of the SP500. THAT is a HUGE number by historic norms for any type of investor......even the professionals.

AS I like to say.......THE POWER OF LONG TERM INVESTING........and......Of course.....I remain fully invested for the long term a usual.

 

BESIDES THE FACT......that nearly EVERY indicator is extremely positive for the general economy........and.....earnings and company data has been overwhelmingly positive for the past THREE QUARTERS.....in spite of.....ALL the DIRE predictions.....the markets continue their SLOG FORWARD.

That is how it works out over the long term. Focus on the short term negativity and news and you get one picture.....focus on the long term and you get a very different picture. This is EXACTLY how the markets work. NOTHING is ever clear cut. Nothing is ever EASY. MUCH OF THE TIME......the markets climb a wall of worry, fear, drama......and even.....panic. MUCH of the time everything is OPAQUE.

I consider that......a BIG POSITIVE.......at this time. Those sorts of....."FEELINGS"......on the part of people will greatly prolong the life of this HISTORIC BULL MARKET.

 

SOME....generally interesting discussion in this little article from my broker......Schwab. It discusses the past year as well as where we are now. ALSO.....discusses the disconnect between stocks and funds and the general economy.

Is the Stock Market Disconnected From the Economy?

https://www.schwab.com/resource-cen...k-market-disconnected-from-economy?cmp=em-QYC

(BOLD is my opinion OR what i consider important content)

"Is the stock market disconnected from the economy? Perhaps, but less so lately. Also, looking under the hood of performance trends over the past year reveals a more nuanced relationship.

Before getting to the many unique characteristics of the COVID-19 cycle, an important reminder to investors is that stocks tend to lead the economy. In fact, the S&P 500® index is one of the 10 components of The Conference Board’s Leading Economic Index (LEI). The LEI is only 1.5% below its prior peak from July 2019 and has erased nearly 90% of its pandemic-related decline. Since last April, the LEI has surged nearly 14%, which is only the second time since 1959 that the nine-month rate of change exceeded 10%.

Because stocks tend to lead the economy, it’s typically the case that at major stock market inflection points, the economic data is typically lagging. In other words, market peaks have generally preceded recessions’ starts, and market troughs have generally preceded economic recoveries’ starts.

As the table below shows, in the post-WWII era, there was only one exception to bear markets starting and ending before recessions started and ended, respectively. Although the 2000-2002 bear market started before the 2001 recession began, the bear market continued for another 11 months after the short/mild 2001 recession had ended.

Bear markets have tended to start and end before recessions have started and ended


Source: Charles Schwab, Bloomberg, National Bureau of Economic Research. A bear market is defined as a 20% or greater drop in the S&P 500. Recession start and end dates are as determined by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee. Past performance is no guarantee of future results.

When comparing the appreciation in stocks to the appreciation of gross domestic product (GDP), we are indeed at extremes in terms of “disconnect.” The ratio of the two is often referred to as the “Buffett Indicator,” given Warren Buffett’s oft-expressed view that it’s his “favorite” valuation metric. As you can see below, the ratio has never been as high as it is at present—recently exceeding the prior peak in 2000. That said, the expected surge in real GDP this year will likely bring this back down to earth via an increase in the denominator.

The “Buffett Indicator” is at an all-time high


Source: Charles Schwab, Bloomberg, as of 9/30/2020.

It has been an extraordinary run for stocks since the short-lived COVID-19 bear market ended in March 2020. The chart below shows just how unique the past year has been. We looked at every S&P 500 decline of at least 25% from an all-time high since the mid-1950s, and then tracked the subsequent rebounds. Needless to say, the stock market’s recovery has been exceptionally strong.

The S&P 500 index has rebounded strongly from its March 2020 low


Source: Charles Schwab, Bloomberg, as of 3/5/2021. Data indexed to 100. Past performance is no guarantee of future results.

Here’s where we look under the hood. From the start of 2020 through the early part of September 2020, performance was heavily biased toward a very small subset of stocks. The so-called “big 5” are the largest five stocks by market capitalization in the S&P 500, and currently include Apple, Microsoft, Amazon, Google (Alphabet) and Facebook.

As of September 2, 2020, the big 5 accounted for nearly 25% of the S&P 500 (remember, it’s a cap-weighted index). Year-to-date through September 2, 2020, the big 5 were outperforming the other 495 stocks by a whopping 62 percentage points, as you can see in the chart below. On average at that point last year, the big 5 were up 65%, while the entire rest of the S&P 500 was up only 3% on average. At that time, it was also the case that nearly 40% of the S&P 500’s stocks were still in bear markets (down at least 20% from their 52-week highs). The moral of that story is that for the first five to six months of the market’s rebound, the market was characterized by a very small handful of COVID-19 “thrivers,” while the rest of the market remained in a beleaguered state. That was certainly reflective of the behavior of the economy at that time.

The big 5 outperformed the rest of the S&P 500 in 2020


Source: Charles Schwab, Bloomberg, as of 3/5/2021. Big 5 stocks include Apple, Microsoft, Amazon, Google (Alphabet) and Facebook. Past performance is no guarantee of future results.

The characteristics noted above can be further fleshed out by looking at two sets of stock market cohorts. The chart below shows the comparative performance of the so-called “COVID winners” and “COVID losers.” As you can see, it wasn’t until early November that the latter cohort began playing catch-up to the former cohort—timed, not coincidentally, with the initial positive news about COVID vaccine efficacy. The latest moves took the “losers” cohort to comfortably above the “winners” cohort.

“COVID losers” began to catch up in November 2020


Source: Charles Schwab, Bloomberg, as of 3/5/2021. Data indexed to 100 (base value=3/23/2020). COVID winners consist of the Communication Services, Consumer Discretionary and Information Technology sectors. COVID losers include the Energy, Financials and Industrials sectors. Past performance is no guarantee of future results.

The market can be sliced and diced another way, as well. The chart below shows two Goldman Sachs-created indexes: “stay at home” stocks (those that are seen as beneficiaries of consumers spending more time and money at home) and “re-opening” stocks (those likely to benefit from consumers spending less time/money at home). Again, the timing of the pickup in relative performance by the re-opening stocks was also pinned to early November; with the latest moves bringing the “re-opening” cohort comfortably above the “stay at home” cohort.

Re-opening stocks began to perform relatively better in November 2020


Source: Charles Schwab, Bloomberg, as of 3/5/2021. Data indexed to 100 (base value=3/23/2020). The GS stay at home basket consists of U.S.-listed equities that may benefit from consumers spending more time and money at home. The GS re-opening basket consists of U.S. listed equities that may benefit from consumers spending less time and money at home. Past performance is no guarantee of future results.

Throughout all the fits and starts of economic activity associated with the implications of the virus/pandemic, the market has also displayed a heightened level of sector rotation and volatility. This is another way to illustrate that there has been some connection between the stock market’s behavior and leadership shifts; and the economic volatility associated with the pandemic.

The table below is a take on the well-known “quilt” chart we often show that ranks broad asset classes based on yearly performance. In this case, we are ranking the S&P 500’s 11 sectors, and doing it on a monthly basis.

Even with a quick glance, you can see that sectors have been all over the page in terms of performance wins and losses. Take a look at the Energy sector as an example. Its one-year performance (far right column) remains near the bottom of the rankings, yet it was the best-performing sector in four months during that period. Technology was the best-performing sector for a lesser three months, yet it remains at the top of the one-year leaderboard.

Sector “winners” and “losers” have changed position frequently


Source: Charles Schwab, Bloomberg, as of 2/26/2021. Sector performance is represented by price returns of the following 11 GICS sector indices: Consumer Discretionary Sector, Consumer Staples Sector, Energy Sector, Financials Sector, Health Care Sector, Industrials Sector, Information Technology Sector, Materials Sector, Real Estate Sector, Communication Services Sector, and Utilities Sector. Returns of the broad market are represented by the S&P500. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

If we look at weekly performance, we see an even starker picture of sector volatility (again, associated with heightened economic volatility). In the chart below, the yellow dots represent the return for each sector since the March 23, 2020 low. The blue bars represent the number of weeks each sector was the top performer among all 11 sectors, while the green bars represent the number of weeks each sector was the worst performer among all 11 sectors. One standout is the Consumer Discretionary sector (which includes Amazon). The sector’s gain since the March 2020 low is near the top of the leaderboard, yet it was the worst performer during more weeks than it was the best performer. Consumer Staples has been the worst performer since the March 2020 low, yet there has been an equivalent number of weeks when it was the best or worst performer.

Weekly sector performance has been volatile


Source: Charles Schwab, Bloomberg, as of 3/5/2021. Past performance is no guarantee of future results.

In sum, looking under the hood of the stock market’s behavior over the past year shows a bit more of a connection than is generally perceived. That said, a lot of prospective good economic news is now priced into the market. Additional economic upside should be rewarded; however, there is also a risk of market weakness if the rosy outlook is less rosy."

MY COMMENT

NICE to see the past year diagnosed and autopsied. BUT......from today on....WE START FRESH.

 

I like this little article. AMAZING that many of the so called experts and media and others seem to be out of touch with the STRENGTH of the recovery. I suspect that most......"regular"....experienced investors have been seeing the TRUGH for a long time now.

Wall Street can't keep up with the economy: Morning Brief

https://finance.yahoo.com/news/wall...with-the-economy-morning-brief-100641090.html

(BOLD is my opinion OR what I consider important content)
"No one can be bullish enough right now
We're one week away from lapping the one-year anniversary of the market's pandemic low.

And Wall Street is still struggling to keep up with the pace of both the recovery in markets and the real economy.

As happens over the weekends and into Monday morning, The Morning Brief's inbox is flooded with weekly updates from economists, strategists, and portfolio managers from across the investment landscape. And the consistency with which these folks have been trying to reframe their outlooks to remain appropriately bullish has been striking.

Late Friday, Deutsche Bank strategist Binky Chadha upped his year-end price target for the S&P 500 to 4,100 from 3,950. Interestingly, this call assumes a lower multiple for the benchmark index but with earnings now forecast to grow 43% over last year in 2021, the firm sees stocks continuing to push higher.

The team over at BlackRock's Investment Institute also caught our attention on Monday, writing, "We see the path out of the Covid-19 shock as a 'restart' — not a typical business cycle 'recovery.' The key reasons are the distinct nature of the shock, broad-based pent-up demand and different inflation dynamics."

Of course, a recovery outpacing expectations isn't exactly a new theme for readers of The Morning Brief.

Just a few weeks back we highlighted January's retail sales report as yet another piece of a puzzle suggesting the economy was bouncing back better than feared. February data on retail sales will be released later this morning and could offer a similar assessment. Recent data from the U.S. manufacturing sector also suggests that upside risks remain a more relevant part of any forecast right now than downside fears about a backslide in economic growth.

"Most market participants and policymakers have been surprised by the speed of the recovery," said Chetan Ahya, chief economists and global head of economics at Morgan Stanley. "On our estimates, the US economy will reach pre-COVID-19 output levels by the current quarter." The firm expects U.S. GDP to grow 7.3% this year and 4.7% next year.

"From 3Q21 onwards, we expect US GDP to overshoot the path it was projected to follow before the recession," Ahya adds. "The last time GDP rose above its pre-recession path was in the 1990s. Back then, it took 15 quarters compared to seven quarters this time around. Moreover, we expect the US economy to reach 103% of its pre-recession path in 12 quarters (i.e., by December 2022) versus 27 quarters in the 1990s."

How exactly investors can or should play this recovery or react to any short-term pressures in the market is sort of a dealer's choice. We can find ample support for buying value stocks, or leaning back into growth stocks, or betting on emerging markets, and so on. Maybe crypto or NFTs are your thing.

All we know for certain is that it's hard to find someone on Wall Street who isn't getting incrementally more bullish right now."

MY COMMENT

WELL......DUH.....as usual. there are many reasons that the "professionals" and the "media" have for missing the OBVIOUS in their.........from on high.....pronouncements. they range from ignorance, ego, hubris, market manipulation, self serving statements to their clients, intentional hedging so they will not look lie IDIOTS, etc, etc, etc. the bottom line......YOU CAN NOT TRUST THEM. Do your own research and manage your own money....if you can.

To long term investors....the "professionals" RARELY have any appreciation of the "little" long term investors....anyway. They are oriented toward PROFITS and that means......active investing and trading. Much of the investment media and industry is NOT interested in the topic of long term investing. SO.....if you have the ability....give them what they deserve......give yourself what you deserve.....cut them out of the picture and manage your own money.

 

I have been evaluating COINBASE as a short to medium term.....primarily....momentum trade when they go public later this month. For anyone else considering this company....here is one of the better articles that I have found.

Can You Make Coin Investing In Coinbase?

https://seekingalpha.com/article/4413646-can-you-make-coin-investing-in-coinbase

"Summary

• Coinbase’s expected valuation has soared from ~$8 billion in late 2018 to ~$100 billion currently.
• Coinbase achieved profitability in 2020, which is encouraging, but the expected valuation implies the company will become the largest exchange in the world by revenue.
• A valuation at the rumored levels is far too high, and investors should not buy this stock at anywhere close to the rumored levels.
• Looking for more investing ideas like this one? Get them exclusively at Value Investing 2.0 . Learn More »

Coinbase’s (COIN) expected valuation has soared from ~$8 billion in late 2018 to ~$100 billion currently. While no official date has been provided, Coinbase is expected to go public via a direct listing in early March 2021. With a rapidly rising valuation, driven by rising interest in cryptocurrency, we do not think investors should expect to make any money in this stock.

At the rumored valuation of ~$100 billion, the stock will earn our Neutral rating. Coinbase achieved profitability in 2020, which is encouraging, but the expected valuation implies the company will become the largest exchange in the world by revenue. It’s hard to make a straight-faced argument that the firm can justify the lofty expectations baked into its valuation given:

• Competition is increasing in the cryptocurrency trading market.
• Neither its current market share or margins are sustainable in a mature cryptocurrency trading market.

The lack of a traditional IPO process makes it difficult to predict where shares will open, especially as Coinbase shares have traded from $28/share to $373/share in private markets since early 2020. Nevertheless, a valuation at the rumored levels is far too high, and investors should not buy this stock at anywhere close to the rumored levels.

This report aims to help investors sort through Coinbase’s financial filings to understand the fundamentals, using more reliable fundamental data, and valuation of this upcoming direct listing.

Revenue Growth Leads to Profits (For Now)
Coinbase stands out against recent IPOs due to the fact it actually generates a profit. According to Bloomberg, 85% of the companies that went public last year (excluding special purchase acquisition companies and REITs) were unprofitable. Coinbase on the other hand grew revenue by 139% year-over-year in 2020, and Core Earnings[1] improved from -$17 million to $317 million over the same time.

The firm’s Core Earnings margin improved from -3% in 2019 to 25% in 2020 while its return on invested capital (ROIC) improved from -3% to 48% over the same time.

Figure 1: Coinbase’s Revenue and Core Earnings: 2019-2020

Sources: New Constructs, LLC and company filings

Growing Market Share in Nascent Cryptocurrency Market
Coinbase has grown its Verified Users from 32 million in 4Q19 to 43 million in 4Q20, or 34% YoY. Monthly Transacting Users (MTUs), or those that engage with Coinbase’s transaction based products, have grown from 1.0 million to 2.8 million, or 180% YoY, over the same time.

The increase in MTUs, along with rising prices of cryptocurrencies, drives Coinbase’s Assets on Platform, or the total value of crypto held on Coinbase, from $7 billion in 2018 to $90 billion in 2020. In turn, Coinbase’s market share, measured as Assets on Platform as a percent of total cryptocurrency market cap, has grown from 4.5% in 2018 to 11.1% in 2020, per Figure 2.

Figure 2: Coinbase’s Share of Crypto Market: 2018-2020

Sources: New Constructs, LLC and company filings

Institutional Users Are Increasingly Driving Volumes
As cryptocurrencies have gained more mainstream acceptance, institutional users’ percentage of trading volume on Coinbase has grown from 20% in 1Q18 to 64% in 4Q20. Conversely, retail users’ percentage of trading volume on the platform fell from 80% to 36% over the same time. See Figure 3.

Despite making up just 36% of trading volume, retail transactions make up 95% of Coinbase’s transaction revenue in 2020, which indicates that retail traders’ may make smaller trades, but the frequency of trades generates significantly more in trading fees.

Figure 3: Coinbase’s Trading Volume by User Type: 1Q18-4Q20

Sources: New Constructs, LLC and company filings

A Mature Market Could Crush Profitability by 98%
As a leading cryptocurrency exchange and brokerage firm in a nascent market, Coinbase can charge a spread on each trade and a trading fee (which is the greater of a flat fee or a variable percentage fee based on region, product feature, and payment type).

In 2020, Coinbase collected ~0.57% of every transaction in fees, which totaled $1.1 billion in trading revenue on $193 billion in trading volume. In total, these trading fees made up 86% of revenue in 2020.

As the cryptocurrency market matures and more firms inevitably pursue Coinbase’s high margins, the firm’s competitive position will inevitably deteriorate. For example, if stock trading fees are any indicator for crypto trading fees, we should expect them to quickly go lower if not to zero. Competitors such as Gemini, Bitstamp, Kraken, Binance, and others will likely offer lower or zero trading fees as a strategy to take market share, which would start the same “race to the bottom” that we saw with stock trading fees in late 2019. Similarly, if traditional brokerages begin offering the ability to trade cryptocurrencies, they will most certainly cut down on the unnaturally wide spreads in the immature cryptocurrency market.

For example, if Coinbase’s revenue share of trading volume fell to 0.01%, equal to traditional stock exchanges, its 2020 transaction revenue would have been just $20 million, instead of $1.1 billion.

To get a sense of just how untenable Coinbase’s competitive position is, Coinbase’s transaction revenue as a percent of trading volume is 57 times higher than Intercontinental Exchange (ICE), which runs the New York Stock Exchange (among others), and Nasdaq Inc. (NDAQ), which runs the Nasdaq. The likelihood of Coinbase maintaining such high fees is very low in a mature market. See Figure 4.

Figure 4: Coinbase 2020 Transaction Revenue Vs. Traditional Exchanges

Sources: New Constructs, LLC and company filings*NYSE and Nasdaq volume estimated based on average daily trading volume of $100 billion as reported by Cboe Global Markets.**ICE and NDAQ transaction revenues equals each firm’s cash equity trading revenues

Cryptocurrency Market Remains Niche Despite Recent Headlines
In its S-1, Coinbase notes “crypto has the potential to be as revolutionary and widely adopted as the Internet.” Such a proclamation is based on the idea that cryptocurrencies allow capital to flow more freely than traditional financial markets due to near instantaneous settlement and real-time payments 24 hours a day, seven days a week, and 365 days a year. While such a comparison can lead to lofty valuations based on a “growth story”, the reality is the cryptocurrency market remains far from “mainstream.”

According to data analytics firm CivicScience, 66% of U.S. adults are “not interested in” crypto and 18% have “never heard of it.” Similarly, CivicScience finds that while the number of people investing in cryptocurrencies is rising quickly, it still remains low at just 9% of U.S. adults. For reference, Pew Research Center estimates 90% of U.S. adults used the internet in 2019.

The vast disconnect between people using cryptocurrency and the narrative that it will replace the existing financial system can help partly explain Coinbase’s lofty valuation. However, one would be hard pressed to make a compelling argument that the firm’s fundamentals can actually justify such a valuation, as we’ll show below.

Coinbase Is Priced to Be the Largest Exchange (by Revenue) in the World
When we use our reverse discounted cash flowmodel to analyze the future cash flow expectations baked into Coinbase’s expected valuation, we find that shares are priced for beyond perfect execution.

In order to justify its expected $100 billion valuation, Coinbase must:

• Maintain a 25% NOPAT margin (above Nasdaq’s 19% but below Intercontinental Exchanges’ 31% in 2020) and
• Grow revenue by 50% compounded annually (well above Nasdaq’s highest seven-year revenue CAGR [2004-2011] of 30%) for the next seven years. See the math behind this reverse DCF scenario.

In this scenario, Coinbase would earn $21.3 billion in revenue by 2027, which would be 1.5x Intercontinental Exchange and Nasdaq’s combined 2020 revenue, 46% of the TTM revenue of the 11 top Financial & Commodity Market Operators[2], and nearly double Charles Schwab’s 2020 revenue.

Figure 5 compares the firm’s implied future revenue in this scenario to its historical revenue, along with the revenue of exchange and brokerage competitors in 2020.

Figure 5: Expected Valuation Implies Greater Revenue Than ICE & NDAQ Combined

Sources: New Constructs, LLC and company filings

If Coinbase maintained its fees at 0.57% of trading volume (as outlined above), this scenario implies that trading volume on Coinbase’s platform would be $3.7 trillion by 2027, which would equal 78% of the total cryptocurrency trading volume in 2020.

But What If Coinbase Is Not the Largest Exchange in the World?
We review an additional DCF scenario to highlight the downside risk should Coinbase see profitability fall in line with traditional brokerages as competition enters the market and cryptocurrency trading becomes a more commoditized business.

If we assume Coinbase’s:

• NOPAT margin falls to 23% (market-cap-weighted average of 18 Investment Banking & Brokerage Services firms under coverage, compared to 25% in 2020) and
• Revenue grows by 21% compounded annually for the next decade (Nasdaq’s greatest 10-year revenue CAGR), then

COIN is worth just $18.9 billion – an 81% downside to the expected valuation. See the math behind this reverse DCF scenario. However, matching Nasdaq’s fastest 10-year revenue CAGR could prove too optimistic given the volatile nature and niche status of the cryptocurrency market. If cryptocurrency fails to break through on a more mainstream level and trading volumes remain dwarfed by stock trading, Coinbase’s growth story would end and the stock would drop precipitously. The company could go bankrupt.

Each of the above scenarios also assumes Coinbase’s working capital and fixed assets increase year-over-year at a rate equal to 10% of revenue. This growth in invested capital is just under half the year-over-year change in invested capital as a percent of revenue in 2020.

IPO/Direct Listing Is Not Without Warning Flags
Despite a profitable business, investors should be aware that Coinbase’s S-1 is not absent some notable red flags.

Public Shareholders Have No Rights. A risk of investing in Coinbase, as with many recent IPOs is the fact that the shares sold provide little to no say over corporate governance.

Coinbase is going public with two separate share classes, each with different voting rights. Coinbase’s direct listing is for Class A shares, with one vote per share. Class B shares provide 20 votes per share and are held by company executives and early investors. For instance, co-founder and CEO Brian Armstrong holds 22% of the voting power, and all executives and directors collectively hold 54% of the voting power. Notable investor Marc Andreessen owns 14% of the voting power in the firm through Andreesen Horowitz. In the end, all public investors combined can expect to gain no more than ~17% of voting power after rewarding the company with a stupendous valuation.

Concentration Risk Is Large
Investors in Coinbase must be aware that the firm’s heavy reliance on Bitcoin and Ethereum create unique concentration risks. In 2020, Bitcoin and Ethereum accounted for 56% of Coinbase’s trading volume and an equal percentage of transaction revenue. Should demand for these two cryptocurrencies decline without an offsetting increase in new cryptocurrencies, Coinbase could see significant cuts to its trading volume and transaction revenue.

Non-GAAP EBITDA Overstates Profitability
While often a favorite of unprofitable companies, Coinbase still presents investors with an overstated picture of its fundamentals through its use of adjusted EBITDA. Adjusted EBITDA allows management significant leeway in excluding costs in its calculation. For example, Coinbase’s adjusted EBITDA calculation removes stock-based compensation expense, acquisition related expenses, and more.

Coinbase’s adjusted EBITDA in 2020 removes $205 million (16% of revenue) in expenses including $70 million in stock-based compensation expense. After removing these items, Coinbase reports adjusted EBITDA of $527 million in 2020. Meanwhile, economic earnings, the true cash flows of the business, are much lower at $285 million.

While Coinbase’s adjusted EBITDA follows the same trend in economic earnings over the past two years, investors need to be aware that there is always a risk that adjusted EBITDA could be used to manipulate earnings going forward.

Emerging Growth Company Designation Means Less Transparency
Coinbase ceased to be an Emerging Growth Company as of Dec. 31, 2020. However, because it filed its draft registration statement to the SEC prior to this date, it's still able to take advantage of the reduced disclosure requirements available to Emerging Growth Companies. We’ve outlined these reduced disclosure requirements here. This designation means reduced transparency for investors, which only increases the risk of investing in Coinbase.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we make based on Robo-Analyst findings in Coinbase’s S-1:

Income Statement: We made $31 million of adjustments, with a net effect of removing $1 million in non-operating income (<1% of revenue). You can see all the adjustments made to Coinbase’s income statement here.

Balance Sheet: We made $1.5 billion of adjustments to calculate invested capital with a net decrease of $968 million. The most notable adjustment was $1.1 billion in excess cash. This adjustment represented 67% of reported net assets. You can see all the adjustments made to Coinbase’s balance sheet here.

Valuation: We made $12.9 billion of adjustments with a net effect of decreasing shareholder value by $10.8 billion. The largest adjustment to shareholder value was $11.5 billion in outstanding employee stock options. This adjustment represents 12% of Coinbase’s expected market cap. See all adjustments to Coinbase’s valuation here."

MY COMMENT

I STILL have not decided on this company. BUT....the above is one of the better summary articles. If I do this trade it will be based on anticipated MOMENTUM.......and....will be a short to medium term trade.