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Insights from Coinbase’s direct listing…..

Insights from Coinbase’s direct listing…..
August 21, 2023

Coinbase’s (COIN) much-awaited direct listing last week was one of the most widely misunderstood events that I can remember in stock market history.  The stock opened for trading last Wednesday at over $400 per share, which was well above the $250 reference price. But what really caught my eye was the company’s staggering earnings guidance. Now that it is a public company, Coinbase is required to report earnings results each quarter. This is the first time we’ve had the chance to see just how great Coinbase’s business is.  And with its direct listing last week, 

we learned that Coinbase expects first quarter 2021 revenue to be a whopping $1.8 billion. The numbers aren’t finalized yet, but Coinbase expects to generate $730–800 million in profit. That’s impressive.  And get this – Coinbase did less than $1.2 billion in revenue for all of last year. It has already exceeded that number in just one quarter. Talk about exponential growth!  And we now know that Coinbase has over 56 million verified users worldwide

That makes it the largest brokerage platform in the world by a large margin. For comparison, Fidelity boasts 31.3 million brokerage accounts, and Charles Schwab has only 14 million accounts.  What’s more, Coinbase’s average revenue per user (ARPU) is between $34 and $44 per month. That’s fantastic! Simply put, this is one heck of a business. That said, there was some negative chatter on Twitter regarding Coinbase’s “IPO.” First and foremost, it wasn’t an initial public offering – it was a direct listing. And there is a huge difference between the two.

As a reminder, Coinbase decided not to conduct a traditional IPO. It went with a direct listing. And with direct listings, existing shareholders – including company executives and employees – choose how many shares they want to sell into the market.  Yet many journalists and investors claimed that Coinbase’s executives were dumping more than 90% of their shares. They suggested that this was a sign that Coinbase was about to implode.  

The people making this claim were completely missing the big picture. Had they simply taken 10 minutes to read the prospectus, they would have understood how the direct listing works. And if we read the filings, CEO Brian Armstrong made just 1.5% of his Coinbase shares available for sale at the time of the IPO. That’s it. What the journalists and Twitter alarmists saw was that Armstrong sold the majority of these shares when COIN listed for trading. But they failed to understand that Armstrong is holding on to 98.5% of his equity in Coinbase. 

So the truth is the exact opposite of what so many wanted to believe. Context is so critical to good investing. I review all information with a critical eye, and it is safe to say that most of what we see on social media is worthless.  

The only way that direct listings work is if existing shareholders offer up a portion of their equity to trade publicly on the markets. It’s not like a traditional IPO where the company issues a whole lot of new equity, which dilutes all existing shareholders. This is a real milestone in the blockchain and digital assets industry. 

And Coinbase is one of the few blue-chip companies in the blockchain industry. Now that Coinbase is public, we can understand what an impressive business it is. COIN has pulled back since it opened for trading. That’s in large part due to the widespread misunderstanding of what an IPO is versus a direct listing.

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