It is not uncommon for large companies to create an investment arm in an effort to gain exposure to adjacent technologies and services in the start-up ecosystem. Salesforce.com has invested in several high-profile companies such as Zoom and, in the case of MuleSoft, has even acquired some of its portfolio companies after reaching scale. Similar to other facets of the technology industry, the crypto sector is home to a number of corporate venture funds as well.
According to data from Crunchbase, crypto-trading platform Coinbase (COIN -0.11%) has made over 200 investments across the crypto landscape since its founding in 2018. Let's dig into why this portfolio could contain some overlooked upside for Coinbase stock.
What is Coinbase Ventures?
Coinbase Ventures represents an in-house venture capital firm underneath the broader Coinbase umbrella. The company uses its profits to make equity investments in smaller crypto players. One reason Coinbase does this is that these investments allow for quick exposure across different areas of the crypto spectrum without the need to spend years researching new markets or technologies and spending excess capital on those endeavors.
Although it is challenging to derive the unrealized value of these investments, Coinbase discloses that it typically holds under 20% equity ownership and does not have meaningful influence over these portfolio companies.
What does the portfolio look like?
According to Coinbase's blog, roughly half of the venture portfolio is comprised of investments in centralized and decentralized finance platforms. The remaining portion of the portfolio is split between investments in non-fungible tokens (NFTs), the metaverse, and Web3 infrastructure. The list below includes some of the highest-profile investments that Coinbase has made:
- OpenSea: Leading NFT marketplace which has raised over $400 million in venture capital funding. In January, the company raised $300 million in a Series C financing and was valued at $13.3 billion.
- Dapper Labs: Specializes in creating virtual collectibles such as trading cards and pets. The company is the developer of popular NFT projects cryptokitties and NBA Top Shot. Dapper Labs was most recently valued at $7.6 billion.
- Magic Eden: Similar to OpenSea, Magic Eden is an NFT auction platform. The biggest differentiator from its competition is that Magic Eden is the largest Solana-based NFT marketplace, whereas OpenSea primarily uses Ethereum. Famed Silicon Valley venture fund Sequoia Capital is an investor alongside Coinbase.
- Dune Analytics: Creates publicly available dashboards that incorporate and synthesize various data points and key metrics in the crypto space. The company was valued at $1 billion in February.
In addition to the above, Coinbase has also delved into new markets geographically. Earlier this month, the company invested in India-based crypto exchange CoinDCX, which is now valued at over $2 billion.
From a macro standpoint, these investments are important because they provide Coinbase exposure to several growth themes within the broader crypto space and also could help facilitate meaningful relationships with notable crypto investors. Given that these strategic investments are in private companies, it is difficult to quantify how much Coinbase is benefiting in terms of return on investment. However, per publicly available data, investors can see that Coinbase has ownership stakes in many multi-billion crypto assets, which could add some validity to the caliber of its portfolio and the prospects beyond its legacy trading services.
Why this could be good for the stock
According to data from Pitchbook, crypto and blockchain start-ups have raised $11.7 billion globally so far in 2022.To put this into context, nearly $30 billion was injected into the crypto space in 2021, which was more than the combined total from 2012 to 2020.
This is notable because investors can see firsthand how active Coinbase Ventures is in the crypto start-up scene. The pace at which institutional money is moving toward crypto and the rising valuations could serve as a lucrative windfall of cash for Coinbase in a liquidity event. Should this occur, Coinbase will have the financial flexibility to reinvest its profits into other growth areas or develop new products and services.
Since its initial public offering one year ago, Coinbase stock has been down almost 50%. Despite the choppiness of the stock market, especially in technology companies, as well as waning prices in Bitcoin and Ethereum, Coinbase has made several cognizant moves to benefit over the long-term as adoption in crypto becomes more common.
Although it operates primarily as a trading exchange, Coinbase could be viewed as a core nucleus surrounded by several high-potential growth drivers in crypto. Should some of the companies in its portfolio continue to rise in valuation, Coinbase could benefit directly in the form of an acquisition and augment its product suite or indirectly in other liquidity events, in which case the company would reap the financial gains on its original investment. Both of these scenarios could provide upside to the stock over the long term.