Although all eyes have been on special purpose acquisition companies, or SPACs, for much of the past year, it's actually a traditional initial public offering (IPO) that's currently the hottest new issue on Wall Street. I'm talking about cryptocurrency trading platform Coinbase (NASDAQ:COIN).
There's virtually no asset class that's been more universally sought after by retail traders over the past 12 months than cryptocurrencies. With Bitcoin, Ethereum, Dogecoin, and a host of other digital currencies soaring, Coinbase has seen its revenue rocket to record levels. In the first quarter alone, the $1.8 billion in revenue brought in by the company is more than it collected in all of 2019 and 2020, combined.
Coinbase isn't the bargain you think it is
Unfortunately, the reality of Coinbase fails to live up to its extremely lofty valuation.
For example, even though Coinbase ended March with 56 million verified users, its operating model is dependent on gaining additional users and having these folks continue to trade some of the world's most popular digital currencies. As we witnessed with traditional brokerages, competitors will continually undercut perceived leaders on commission costs in an effort to lure away users. There's nothing stopping a competing cryptocurrency platform from regularly undercutting Coinbase's commissions.
Additionally, the Coinbase operating model is entirely dependent on the euphoria surrounding Bitcoin and Ethereum continuing. That's because trading in these two digital currencies accounts for the vast majority of the company's revenue. Between the end of 2017 and the end of 2019, when Bitcoin lost in the realm of 80% of its value, Coinbase's sales nearly halved.
Furthermore, since a sizable percentage of cryptocurrency traders are young investors, it wouldn't be a stretch to postulate that many aren't familiar with capital gains taxes or wash-sale rules and are about to learn a hard lesson in 2021 or the following year. This could adversely affect Coinbase's future trading revenue.
The point is this: Coinbase's operating model is easy to disrupt. That makes it a terrible investment opportunity.
These are much smarter buys than Coinbase
Instead of diving into an IPO with a flimsy investment thesis, consider buying the following trio of stocks, all of which are infinitely smarter buys.
A considerably better way to put your money to work right now would be to buy cybersecurity stock CrowdStrike Holdings (NASDAQ:CRWD). CrowdStrike might be pricey, but it has discernible competitive advantages that are lasting, which isn't something you'll get from Coinbase.
Although there are a number of fast-growing trends this decade, cybersecurity might just be the safest. With businesses moving online and pushing into the cloud more now than ever before, the onus of protecting enterprise data is increasingly falling on third-party providers like CrowdStrike.
What makes this company so special is its cloud-native Falcon security platform. Being built in the cloud allows Falcon to be nimbler than on-premises solutions. Further, its reliance on artificial intelligence means it's getting better at recognizing and responding to threats over time. Each week, Falcon oversees more than 5 trillion events, which is providing more than enough control data to recognize things that are out of the ordinary.
If you dig into the company's quarterly results, it's plainly evident that CrowdStrike's customers approve of its solutions. Last year, the company retained 98% of its existing clients and saw those clients spend between 25% and 31% more between the first and fourth quarters of fiscal 2021 than they did in the respective year-ago quarters.
What's more, 63% of CrowdStrike's customers have purchased four or more cloud module subscriptions. That's up from just 9% of its customers less than four years ago. Since subscriptions generate big-time margins, CrowdStrike has been able to hit its long-term subscription gross margin target of around 80% very early in its growth process.
Planet 13 Holdings
Why Planet 13? For starters, the U.S. cannabis market is where investors should be putting their money to work. By mid-decade, it'll potentially be up to seven times the size of the Canadian marijuana market, and according to New Frontier Data could grow by an average of 21% annually through 2025. This makes U.S. multistate operators (MSO) and ancillary businesses the smart way to play the green rush.
On a more company-specific basis, Planet 13 is offering something that no other MSO can compete with: a cannabis experience for the ages. The company's lone operating store just west of the Las Vegas Strip in Nevada spans 112,000 square feet, which for comparative purposes is about 7,000 square feet larger than the average Walmart store. It features ample selling space, a restaurant, events center, and a consumer-facing processing center. It's essentially a must-see for cannabis enthusiasts.
Although Planet 13 was initially hit hard by the pandemic in 2020, the event actually turned into a positive for the company. Previously a tourist-reliant business, Planet 13 has found an additional channel of revenue by appealing to local residents via curbside pickup and delivery. Even with last year's challenges, the company's sales still grew, with Planet 13 accounting for 8.2% of Nevada's total weed revenue in the fourth quarter.
The real intrigue is the 40,000-square-foot SuperStore being opened up in Santa Ana, California, later this year. If Planet 13 can duplicate its blueprint for success in markets outside of Nevada, the sky could be the limit for its unique operating model.
A third stock that's an infinitely smarter buy than Coinbase is fast-growing real estate company Redfin (NASDAQ:RDFN).
Without question, the real estate market has put some pep into Redfin's step in recent quarters. Historically low mortgage rates have enticed prospective homebuyers to take the plunge while encouraging sellers to get top dollar for their properties. We may never see demand for housing peak like we have in recent months. That's all great news for Redfin, which has grown its share of homes sold in the U.S. from 0.44% in 2015 to 1% on the nose in 2020.
What sets Redfin apart is the company's tech-driven and cost-oriented operating model. For instance, sellers can list their homes with Redfin for a 1.5% commission fee, or 1% if they buy and sell a home through Redfin. Comparatively, that can be up to 2 percentage points lower than traditional real estate firms. With the prices of homes soaring, the savings Redfin can provide sellers has been magnified.
And it's not just cost-cutting that's putting Redfin on the map. The company's focus on personalized services really helps to set it apart from its competition. The RedfinNow service, which operates in a handful of markets, acquires homes for cash for a variable service fee. It's a way of giving homeowners a quick, hassle-free way to sell. Further, Redfin Concierge is a service ranging from 2% to 2.5% of the sales price that focuses on staging and updates to maximize bidding potential.
The real estate space is ripe for disruption, and Redfin has all the tools necessary to become an industry leader.