In today's video, I'm going to raise a couple of points as to why Square (SQ +2.43%) is a better buy than Coinbase (COIN +0.93%), which is going public this week through a direct listing. You can expect a pretty high valuation, especially since we're in a crypto bull market. Investment bank D.A. Davidson says valuation could reach $90 billion. We're also going to have a look at Coinbase's first-quarter estimated earnings (pretty impressive).
Q1 2021 estimated results
- Verified users of 56 million
- $1.8 billion in total revenue, a 207% increase from the fourth quarter of 2020
- Net income of approximately $730 million to $800 million
- Adjusted EBITDA of approximately $1.1 billion
How does Coinbase make money?
When you buy, sell, and send on Coinbase, it takes a fee (flat or a percent of the value). Taken from its S-1 filing:
We generate substantially all of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets by our customers. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction.
The bigger picture
Right now, you can only trade Bitcoin on Square's Cash App and we know how much it makes from it -- a lot. What is stopping the likes of Cash App from adding more crypto? What is stopping other platforms (such as SoFi and PayPal's Venmo) from copying Coinbase? Nothing.
Yes, Coinbase has a reputation that's true, and it's probably the NASDAQ of crypto. But that's about it in my opinion.
Second, wouldn't you be better off owning the crypto rather than the company holding the crypto?
Bull vs. bear market
During a bull market, Coinbase will make more money than during a bear one.
Taken from the S-1 filing:
Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected. We generate substantially all of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets by our customers. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction.
So, in short, the higher the price of Bitcoin, the higher the fee. During a bear market, crypto prices go down and so will the revenue from those fees. During a bear market, people are less likely to buy crypto because -- let's face it -- the FOMO is real when things go up, not when they come down.
Conclusion
Coinbase will play a significant role for crypto in the years to come, but I believe Square is a better buy at the moment because of the points mentioned above. Square holds Bitcoin on its balance sheet, so you get exposed to that; you get exposed to the Bitcoin trading on Cash App as well, and hopefully, in the future, it will add more assets such as Ethereum and Ripple. And ultimately, you get exposed to everything else Square does.
Neither company is cheap and that's fine if you're a long-term investor. But there are too many uncertainties regarding crypto to pay this high of a premium for Coinbase at the moment.
*Stock prices used were the closing prices of April 9, 2021. The video was published on April 13, 2021.
