You might be looking into non-fungible tokens (NFTs) after seeing images of things called "CryptoPunks" or "Bored Apes" sell for thousands (and millions) of dollars on the internet. NFTs are the latest craze, yet most people are still trying to understand them.
NFTs have capabilities that could make them valuable in the digital economy, but they are so new, it's hard to put a value on them. Looking at the cryptocurrency platform Coinbase (COIN -2.31%) might be a good place to start. Here's how the company's planned NFT marketplace can help investors profit from NFTs without having to buy any.
NFTs can do a lot of things
Investors look at NFTs and see images, but what's essential about NFTs is the part that you can't see with the naked eye. Built on the blockchain (technology that creates and tracks digital records of transactions or ownership on networks of computers), NFTs are unique digital assets. In other words, an NFT has a digitally verifiable fingerprint that makes it unique. Even if you copied the image, it would be like a replica of a painting; it still wouldn't be the original.
Image source: Getty Images.
But NFTs are about much more than art; NFTs can create community. For example, the Bored Ape NFTs double as membership access to the "Bored Ape Yacht Club," which can include various perks for everyone who owns one of its unique NFTs. The blockchain verifies ownership so that nobody can get in with just a copy.
But just like in many new markets, it's hard to determine which NFTs will hold value over the long term and which are part of a bubble, bound to become worthless over time. Thanks to Coinbase, investors can instead own the marketplace that will benefit from the broader growth of NFTs rather than try to guess how much individual NFTs will be worth in the future.
This new NFT marketplace could be huge
Coinbase is already one of the world's largest and most trusted cryptocurrency exchanges. Cryptocurrencies use blockchain technology, making Coinbase's digital specialty a natural fit for NFTs. Coinbase has 7.4 million monthly transacting users, a large base for exposure to NFTs.
The company has already said it will open an NFT marketplace, with more than 2.6 million users on the waiting list. For reference, OpenSea now is the world's largest NFT marketplace with 1.8 million users. In other words, Coinbase's huge footprint could make it the world's biggest NFT marketplace overnight.
Coinbase benefits from NFT investors the same way it does from crypto investors. You don't need to directly own the assets; investing in the marketplace means that you benefit as long as people buy and sell on the platform.
The business is already printing profits
When assets are bought or sold on Coinbase, the company takes a fee much like Visa or Mastercard doesfor transactions on their networks. Coinbase is very profitable because most of the revenue it generates falls straight to the bottom line.
COIN Revenue (TTM) data by YCharts
Coinbase has an 86% gross profit margin. Even after research and development, marketing, and other expenses, nearly half of its revenue becomes net income, the profits left after all costs and taxes.
J.P. Morgan recently estimated the NFT universe to be worth $7 billion, but the long-term potential is much higher. Jefferies estimates that NFTs could be worth as much as $80 billion by 2025.
Suppose Coinbase becomes a mainstream leading marketplace for NFT assets. In that case, this could become a substantial growth opportunity for Coinbase, and a profitable one, given the high-margin nature of its marketplace business model.
Investors will want to keep an eye on the metaverse to see how NFTs evolve over time. The metaverse could create a digital economy in the years ahead, which would be a boon for NFTs and cryptocurrencies, where value can be exchanged in a digital and secure manner with blockchain technology.
The stock is on sale
Many growth stocks such as Coinbase sold off during the past couple of months. Coinbase's 25% decline during the past month to about $250 gave it a price-to-earnings ratio of about 22 as of mid-December.
COIN P/E Ratio data by YCharts
The S&P 500 now trades at a P/E ratio of about 29, so does Coinbase deserve a lower valuation than the broader stock market? We can see in the above chart that Coinbase has high expectations for earnings growth, and estimates call for more than 20% growth per year on average for the next three to five years. I think that Coinbase's leadership in crypto and potentially NFT assets gives it a logical runway to achieve that growth, so a valuation discount to the market could make it attractive at its current price.
If digital assets continue to grow and earn critical roles in the metaverse in the years ahead, we could see a large influx of wealth enter the space. Coinbase's marketplaces and exchanges can expose investors to the broad upside without assuming the risk of picking and choosing specific assets.
