Coinbase Global (COIN), the crypto brokerage firm, reported on Feb. 15 that adjusted operating cash flow for Q4 was over 32% of revenue. This huge margin implies that COIN stock could be worth substantially more if this keeps up. Moreover, its put options premiums are very high. This is good for investors who sell them short as an income play. This article will describe these points.
COIN stock is trading for about $183 up 10% in morning trading on Monday, Feb. 26. The stock is up about 7% as well since the results were released. What is going on here? It seems that investors are re-evaluating the upside potential in COIN stock.
Let's look into this. The truth is that it's all about the company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), a cash flow metric. I like to focus on adjusted operating cash flow (OCF) for financial stocks, especially their margins.
Operating Cash Flow Margins Skyrocket
Coinbase reported that its revenue rose 49.6% from $605 million to $905 million in Q4 2023. More importantly, the company said that its adjusted operating cash flow was $292 million.
This means that almost one-third of its revenue (i.e., $292m/$905m = 32%) went straight into Coinbase's bank account. That is after deducting all its cash expenses other than capex spending and net change in USDC (a digital currency in U.S. dollars) and deposits in transit. This was reported on page 10 of the company's shareholder letter.
Moreover, if this keeps up we can forecast that the company could potentially generate at least $1.3 billion in adj. OCF in 2024. That is 77% over the adj. OCF of my estimate of $783.7 million for all of 2023. (This can be seen by taking the $922.95 million in operating cash flow for 2023 and deducting a net $139.18m in USDC and deposits in transit - see page 112 of its 10-K).
So, it's possible that if current trends continue the company could experience a huge increase in adj. operating cash flow. How much will this affect the stock?
Setting a Price Target
One way to do this is to use a cash flow yield metric. This assumes that the company would pay out 100% of its adj. operating cash as a dividend. For example, in this case, if Coinbase were to do this, it's possible that the stock would have at least a 1.0% dividend yield.
So that means we can multiply the adj. OCF forecast by 100x since the inverse of 1.0% is 100. That leads to a market cap estimate of $130 billion (i.e., 100 x $1.3b adj. OCF estimate). That is 3x its present market cap of $43 billion (i.e., an upside of 200% in COIN stock).
But, just to be conservative let's use a 1.5% cash flow yield metric. That implies a market cap of $86.7 billion since 1.5% is the inverse of 66.7x. This implies an upside of 100%. Even using a 2.0% cash flow yield implies a 51% gain in COIN stock, as this implies a 50x multiple (i.e., 50 x $1.3b = $65b market cap, or 51% over $43 billion).
So, you can see, there is a significant upside in COIN stock from here. One way to play this is to short out-of-the-money (OTM) puts.
Shorting OTM Puts for Income
Coinbase's put options now have huge premiums. Short sellers can take advantage of this as an income play and as a potential way to buy in cheaper.
For example, look at the March 15 options expiry period, three weeks away. It shows that the puts at the $165 strike price, 7.24% below today's price, trade for $6.75 per put on the bid side.
That represents a potential income yield of 4.09% (i.e., $6.75/$165.00) to the short seller. That is very high as most put options play this far out-of-the-money will usually yield less than 1.0%.
Moreover, as you can see in the table above, even the $160 strike price, 10% below the spot price, trades for $5.10. That presents an immediate yield opportunity of 3.1875% (i.e., $5.10/$160).
Moreover, even if the stock falls to these levels, investors can take comfort in the fact that COIN stock is worth substantially more.
The bottom line here is that COIN stock is worth significantly more than its present price assuming its operating cash flow continues with this huge margin. Investors can buy COIN stock as well as short puts as a way to gain income or else buy the stock cheaply if the puts are exercised.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
