We are positive on the outlook for cryptocurrencies as a massively disruptive technology: MoffettNathanson

Lisa Ellis, MoffettNathanson LLC Partner joins the Yahoo Finance Live panel to discuss the public debut of Coinbase on the Nasdaq.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. We are still waiting for that Coinbase opening trade here, but the latest indication of holding at 375 bucks a share, indicating that we could see a valuation very close, about $2 billion short of $100 billion valuation, still in line to be the largest direct listing ever here in history. But what is fair value when it comes to Coinbase? And where should investors expect it to trade?

For more on that, I want to bring on an analyst in her note, who has a $600 price target. MoffettNathanson, a partner, Lisa Ellis joins us right now for more on her 600 buck price target. And Lisa, thanks for coming on. It's interesting because people might hear that and say, all right, well, she must be factoring in continued success here in the run of Bitcoin. But your note, you dig into it and you say you're forecasting a turn in 2022, where trading volumes actually fall 35% relative to what we're seeing this year. So talk to me about how you arrived 600 bucks a share.

LISA ELLIS: Yeah, sure, so just mathematically, 600 bucks a share is about 20 times fiscal '23 revenues. And that multiple, the 20 times, is very similar to other companies of sort of comparable scale and growth, like a Shopify or an Affirm or a Square, like companies we think of, businesses like that as analogous to Coinbase. But agreed, we don't-- this isn't, you know-- 600, I know the headline sounds, like, super bullish. But when you read our comments, you know, this one is not an easy one, right? It's a little bit tricky. It depends a bit on your time horizon.

On one hand, we absolutely anticipate that we will likely see another crypto winter soon. We expect 2022 revenues to be lower, meaningfully lower than 2021, just assuming that we're going to see the cyclicality in the crypto ecosystem like we've seen before. But more than offsetting that in our view, if you are a longer term investor, is that this is, in our view, we are positive on the outlook for cryptocurrencies as a massively disruptive technology. And in our view, as a result, Coinbase, as the only US-listed large stock and the market leader in the space, is really a must-own asset if you are a growth or tech-oriented portfolio with a multi-year time horizon.

AKIKO FUJITA: Lisa, to what extent have we already seen the peak levels? I mean, you talk about the huge growth that we have seen just in Q1 for the company, revenue growing nine-fold. If we're talking about a 35% revenue drop next year, is that more realistic with which investors should be looking at in terms of the ability for this company to be able to grow long term?

LISA ELLIS: Yeah, so, like, through cycle, you know, CAGR-- so if you look at a revenue CAGR over a three to five-year time horizon, when you're, like, kind of looking through the crypto cycles, we're expecting about 50%. And that is, if you just look back in time, that's similar to what we saw out of the early days of a Facebook or an Amazon, these other leaders at the early stages of a big technology disruption, a through cycle CAGR of about 50%.

But 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. So, we just baked in a similar peak and valley to what we saw back in 2017 into 2018, which was about a 30% to 35% peak to trough drop on a trailing 12-month basis. That's, you know, just a reference point.

There's a lot of reasons why it might be less this time around because of the institutional holdings, et cetera. But just again, for conservatism's sake, we're not presuming that's going to happen. We're just going to wait and see. But we think, you know, you need to go into this with eyes wide open that that, you know-- that over the next three, four, or five quarters, you could see something like that, although we're super bullish, as we said, on the long-term. We just try to be very transparent. You know, ideally, you have a two to three-year time horizon with this one.

ZACK GUZMAN: Well, we just saw the indication move up a bit here. So as you're speaking, you're willing your 600 price target to life here. But there are unique risks, right, when we talk about Coinbase. We've talked about for weeks leading up to this. And they've noted it, too, in their S-1. I mean, there's a serious concentration risk when you're talking about the price of Bitcoin and Ether.

But also, there's some other strange ones they note. They note that if anyone were to find out or identify who Satoshi Nakamoto, the founder of Bitcoin, actually was, that could be a problem. That's something no other company, I'm sure, has there in S-1. But when we talk about the other competitive risks here, how do you see their ability to charge so much for transaction fees coming down as new entrants build up? We talked about the Winklevoss twins' Gemini platform, others out there. How do you see that changing over the next couple of years?

LISA ELLIS: Yeah, I think that-- look, no question, fee compression in the retail business, given brokerage business given is 90% of the revenue, is a very discrete risk. I think that it's, though, on one level, overblown and also sort of missing the point a little bit. At one level overblown because storing crypto assets is incredibly difficult, uniquely difficult, because they are literally a digital form of cash, a digital bear asset. Coinbase has very differentiated capabilities in actually securely storing, facilitating markets and exchanges in crypto assets when you're integrating across 15 different blockchains.

Like, that's not something that a traditional brokerage can wake up and do overnight, or even the other players in the space can do when you're talking about Coinbase being, often, 10x larger than peers, so it has the benefit of scale in their investment capacity. So I just, on one hand, think, like-- I think there's perhaps-- eventually, of course, yes, we have 50, 60 years of history of the financial markets that fee compression will eventually come down. I just think expecting that to happen, like, imminently is a bit overblown.

On the flip side, as well, I think it's also a bit missing the point. I mean, 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 end game is not retail crypto brokerage. It's to really become a broad technology infrastructure player across the entire crypto ecosystem, which is a much broader vision than simply doing retail trading and crypto.

AKIKO FUJITA: So Lisa, if we're talking about 96% of revenue generated from transaction fees right now, to what extent does that mix hold? And what are the other channels of revenue that you're looking for potentially down the line?

LISA ELLIS: Yeah, so for the-- you know, in the immediate term, especially if values of crypto assets stay high, we certainly expect that mix to remain high. But that other, just to give a sense for what some of the other sources of revenue are, one, they're starting to build-- you know, they got a product called Coinbase Commerce, which is geared toward enabling merchants, as merchants become more comfortable with crypto, enabling merchants to accept cryptocurrencies.

They've also got-- they just bought this company called Bison Trails that we're super excited about that is a developer platform for cryptocurrency for blockchain. So that it's the customer base-- you know, think Microsoft Azure for blockchains, where you create a platform that then developers build applications on top of. Those are some of the ideas, you know, some of the other revenue streams that are still nascent, complete absolutely. But again, if you're taking a longer term time horizon, that's really what you're really focused on with Coinbase, is their-- the speed at which they develop those other revenue streams.

AKIKO FUJITA: Yeah, it's interesting, Lisa. We've heard a lot of comparisons to Microsoft today in our conversations about where Coinbase is. It's good to talk to you, Lisa Ellis, MoffettNathanson partner. Great to have you on today.