Your Daily KnowHow
The Big 5 are back | What Coinbase means for equity markets?
“My problem lies in reconciling my gross habits with my net income”
What is in today’s daily?
In today’s ‘Your Daily KnowHow’ we look at what the Coinbase IPO next week means for the crypto space and the market itself, while reiterating our positive view on Paypal from our analysis a week or so back. Big tech is also getting everyone excited at the moment. Can you really make money by owning the largest of large caps? We think you can.
Overnight Commentary:
Asian markets were mixed on Friday. Greater China markets fell off the back of inflation rising higher than the market expected with regulators signalling further measures to curb lending growth. There’s been a fair amount of profit taking in other Asian markets while Japan has been an outlier with tech driving the outperformance. US futures are mixed today post a week of low conviction and low volumes. S&P 500 futures fluctuated while Nasdaq futures traded lower driven by the factory-price data in China spurring global inflation worries despite Fed Reserve Chair Jerome Powell’s promise of a US recovery without surging spaces. Over in Europe and the week looks to be ending a little flat, however, the Stoxx 600 is on track for its sixth straight week of gains, the longest run since Nov 2019.
The Big 5 are back…
There has been a fair amount of excitement in the media over the past few days around the resurgence of the FAAMGs or Big 5 (Facebook, Apple, Amazon, Microsoft and Alphabet). Have a look at this chart below. After having done very little over the past 6 months, we have started to see a pick up again.
The value bears have a tendency to highlight the premium at which these stocks are now trading vs the broader market and in particular cyclicals. Chart below.
Today, the combined FAAMG group trades at a near 40% premium to the S&P, broadly the highest it has ever been. But, we think this is misleading. If you look at the relative growth of these stocks on a trailing basis, you should argue that this premium is more than justified.
Our view is that as yields remain subdued (lets park the US 10-yr treasury discussion for now), the market will continue to flock towards businesses that are growing strongly over the next few years. If economic activity picks up sustainably, then that group of stocks will of course also include quality cyclicals. We use the below chart as our framework for assessing value relative to growth across the whole market.
For what they offer, highly visible and quality growth at scale, the FAAMGs remain very good value in this market.
What does the Coinbase IPO mean for the market?
Coinbase is set to start trading on 14th April with the company choosing a direct sale instead of a using a bank. Perhaps an apt decision from a company that is built around being ‘different’. The company’s crypto exchange is the largest in the U.S. and it was founded in 2012 by Brian Armstrong and Fred Ehrsam. Based on its shares sold recently in private markets, Coinbase could command a market cap up to $100bn. To contextualise this, Goldman Sachs’ market cap is $118bn… ouch!
There are two reasons we think this is interesting: (1) This offers a potentially more stable way to play the Crypto revolution instead of just buying / selling Bitcoin or other crypto currencies i.e. you buy the obsession and the trend without getting caught in the volatility, (2) The continued ‘normalisation’ of crypto will further support those companies who are already big players in the space. We have spoken on these in the past, in particular Paypal, Facebook and Square all have relevant exposure and should gather share.
A Stable Bitcoin Play: If you are looking for a more stable way to express the shift to crypto, then Coinbase will offer just that. The growth opportunity for the company is compelling if you put into context the the current growth rate (below left) and the potential institutional opportunity. We don’t think comparing crypto activity to stocks is a fair comparison but certainly, there are plenty out there that do. So, here is the context… in publicly traded stocks, the retail market makes up a max 25% of volumes. Crypto is gradually institutionalising and the green section (below right) should grow and in theory exceed the retail volumes. On top of this, as the market matures, volatility in the bitcoin price will likely become a more supportive factor for Coinbase.
Readacross to other players? In our first single stock analysis (see here) we spoke about the upside optionality the likes of Paypal have from this growing crypto theme. To reiterate the relevant paragraph below, we said:
“Crypto Optionality: Whilst we have nothing in our numbers, the launch of ‘Checkout with Crypto’ today marks a very exciting opportunity for Paypal. If nothing else, this will drive customer engagement but as Crypto becomes more mainstream. To contextualise the opportunity, currently +50% of Paypals crypto holders login to Paypal each day. Now they have the opportunity to spend their Crypto and while initially this will work without Amy extra fees, increased customer engagement will continue to drive higher revenues for their other Crypto businesses in addition to their more stable businesses”
The competitive nature of the businesses must not be underestimated but in an environment where crypto is still in its infancy (the blockchain market is set to grow at least 67% CAGR to 2025), we are confident that newsworthy IPO’s, such as Coinbase’s, will benefit all the key players in the market. As a reminder, for someone like Paypal, Facebook or Square we currently have very little, to no, numbers in our conservative estimates for crypto so flexing these assumptions could realise even greater than the 40% upside we had initially for Paypal.
In the past, we have argued that the market is underestimating the rise in crypto from an institutional standpoint. Next week is set to be another step in the right direction for this massive disruptor. The key point for us though is: while Coinbase offers a potentially more stable way of playing this theme directly, there are a huge number of well established companies that should benefit too.