A marketplace is one of the best business models to have. Once it is set up, a company can sit back and collect a small fee on every transaction. As long as the buyers and sellers continue showing up, there isn't a lot of investment required as activity grows. That means past a certain point, it's mostly profit.
It's worked for companies like eBay and Etsy in retail, and Coinbase (COIN -2.31%) and Intercontinental Exchange (ICE 0.65%) are putting the concept to work in the financial market. Let's dig deeper to discover which would make the better investment, the platform serving traditional financial interests or the one trying to establish a beachhead in the new crypto economy.
Image source: Getty Images.
The platform
Intercontinental Exchange operates marketplaces and provides data services and technology to corporations, government entities, and financial institutions. It offers trading and clearing of major asset classes like stocks, futures contracts, and bonds, as well as an end-to-end digital workflow for U.S. residential mortgages. The company now operates six financial clearinghouses, serving as an intermediary between buyers and sellers to validate and finalize transactions.
It was created to provide transparency and efficiency in the energy market and has expanded over the past two decades through new services and acquisitions. Purchases like the New York Board of Trade and NYSE Euronext expanded its offerings into commodities and futures, while the acquisition of Ellie Mae last year made it a leader in the mortgage market.
On the other end of the financial system is Coinbase, a company providing financial infrastructure and technology for the crypto economy. Over 96% of revenue comes from transaction fees from its more than 15 blockchain integrations and 223 crypto assets. The company has more than 56 million verified users, 11% representing institutions and the rest retail. Those institutions make up 64% of trading volume.
Coinbase continues to expand its offerings. In the first quarter, management launched an asset hub to help issuers of cryptocurrency integrate with its platform. It also expanded a loan product, allowing retail users to leverage their crypto holdings with a line of credit. As for the crypto ecosystem, management recently introduced a cloud-based service allowing companies to send, accept, and store crypto payments.
The business
Intercontinental Exchange benefits from activity regardless of the direction asset prices move. That is borne out by the past few years. Although revenue can be lumpy due to acquisitions, the three years prior to the pandemic averaged a modest 3.2% revenue growth and 13% earnings-per-share (EPS) growth. Between 2006 and 2019, the company delivered 17% compound annual EPS growth. Consistent profits allow the company to pay a dividend of $0.33 per quarter, a 1.2% yield. The payout may not be much, but it has grown 65% since 2017.
That consistency is occasionally disrupted by turbulent years. Revenue jumped 16% last year as uncertainty drove record volume. That growth is underlined by a 23% rise in the first quarter amid the market turmoil due to COVID-19. The elevated rate of growth is continuing so far in 2021. The company recently posted 15% growth for the first quarter.
With only a month of being public under its belt, it's unclear whether Coinbase will offer the same level of consistency. It certainly benefits from trading activity regardless of prices. Speculation in cryptocurrencies since last summer -- especially during the first quarter of 2021 -- has produced eye-popping growth. Revenue grew a robust 139% for fiscal 2020, but the first quarter of 2021 saw year-over-year revenue explode 843% higher. Trading volume for institutions actually grew almost 1,100%. That was a little faster than the 1,000% growth in retail trading volume.
Unlike Intercontinental Exchange, the future for Coinbase is largely unknown. Regulation or competition from traditional exchanges could curb growth. Of course, segments of the financial industry might continue migrating to the crypto economy, further accelerating the amount of assets on the platform. It already has 11.3% of crypto asset market share.
Uncertainty about which outcome is likelier will almost certainly lead to a lot of volatility in the stock price. Either way, Coinbase is building a portfolio of products and services that enable the proliferation of crypto assets. Management believes crypto could be as widely adopted and as revolutionary as the internet. With volume in the first quarter at levels 10 times last year's, they might be right.
The verdict
Both companies have robust marketplaces they are using to add services and grow revenue. Deciding which company is a better investment has a lot to do with what kind of investor is making the decision and their view of the global financial system.
Intercontinental Exchange is a way for investors to have low-risk exposure to traditional financial markets. It is growing methodically and returning profits to shareholders. On the other hand, Coinbase could represent the future. Even if it does, it's hard not to think the recent buzz about alternative digital currencies and promotional activity of celebrities is a bit overdone.
In many ways, the hype around the crypto economy may actually hinder its adoption by the mainstream financial establishment. With the businesses trading at close to the same market capitalization -- $53 billion for Coinbase and $63 billion for Intercontinental Exchange -- the safer bet seems like the right one in this comparison. If you are interested in a dominant marketplace facilitating financial transactions across broad swaths of the economy, buy the one that already fits that description, not the one hoping to.
