Coinbase 'is a more diversified play on crypto,' DA Davidson director of research says

Gil Luria, D.A. Davidson Director of Research, joins the Yahoo Finance Live panel to discuss the latest moves in the cryptocurrency market.

Video transcript

ZACK GUZMAN: I want to shift over, though, to what we're seeing play out in the crypto space in today's Crypto Corner. Of course, Bitcoin still off more than 20% in the last week. It's been a bit of a drag on some of those crypto levered plays. Mainly, I would point out Coinbase also off by about almost that same margin in the same time period. But our next guest says that it could still be poised for a more than doubling here if Q2 comes in stronger than expected. A $650 price target on shares of Coinbase is what Gil Luria has, DA Davidson Director of Research who joins us now.

And Gil, appreciate you taking the time to chat here, man. I mean, Coinbase has traded a bit lower. It hit its all-time low here since their direct listing. But talk to me about why maybe Bitcoin may be overlooked here. We know the price action there, but alt coins very important to what Coinbase does.

GIL LURIA: Yeah, so Coinbase, we're going to have to figure out how to price it. The market is still in the process of price discovery for Coinbase. And for now, it's just going to trade in line with Bitcoin. And that's OK. Our argument is, though, that Coinbase is a more diversified play on crypto. So not only do they trade other crypto assets-- these days, a lot of Ethereum and soon Dogecoin-- but also, they have to do a lot more-- their results have to do a lot more with volatility than with just asset prices.

So the fact that there's been a tremendous amount of volatility and even just in Bitcoin prices over the last few weeks, this is actually very good for them. It's even better than Bitcoin continuing to go up because they get paid trading commissions. So they're actually better off in a volatile market than a market that goes up gradually.

ZACK GUZMAN: That's a very good point. I also feel like it'd be worthwhile to maybe point out the institutional growth that they reported kind of leading up to their debut because that was really what they seemed to be emphasizing. And I imagine a pullback here might be something of an entry point for maybe institutions thinking about it. Of course, MicroStrategy, one of those names out there that's been stacking Bitcoin on their balance sheet, buying some more here. But I mean, what does that side of the business look like in Q2 and moving forward since we haven't necessarily seen some of those big name companies follow the likes of Tesla or Square in adding?

GIL LURIA: That's a really important point. The key for Coinbase is that institutional market. And when we say institutional, we mean more institutional investors, hedge funds, investment firms, than corporates. Corporates have been one-offs. It is just Tesla and Square and Overstock and MicroStrategy for now that may take longer to develop. But the fact that hedge funds and investment firms are now putting a certain allocation into crypto, that's something that's been a long time coming and looks like will continue going forward. And Coinbase benefits from that more than anybody else.

AKIKO FUJITA: I mean, if the case is really that it doesn't necessarily have to be Bitcoin, which I think most people would argue-- would agree with on Coinbase, I mean, what are some other coins you're watching right now that you see real upside?

GIL LURIA: Well, Ethereum is the really other interest-- is the other coin that's-- or curbs your asset that's really interesting right now. A lot of development is happening on top of Ethereum. And so it's a very innovative technology that will allow us to decentralize a lot of financial transactions. And there's a tremendous amount of capital and talent flowing to building those types of decentralized financial solutions on top of Ethereum. So that's the one that's getting more attention and I believe will increasingly get more attention.

Bitcoin does a lot of things really well. These days, it's mostly an investment, a speculative trading category, and for some true believers, a future important currency. But Ethereum is where a lot of the new innovative solutions are being built on, which will make Ether more valuable.

ZACK GUZMAN: Yeah, and when we look at-- just going back to the $650 price target, I mean, I wonder what the catalyst might be, aside from a rebound in maybe Bitcoin prices. But even to your point, if volatility is the name of the game, maybe just the broader investment community waking up to that fact and having higher expectations for Q2, I mean, what's the timeline look like for you over the next couple of quarters here for Coinbase since that is some pretty serious upside at your price target?

GIL LURIA: I think that's exactly how it's going to play out. Every quarter, they report the growth, the type of spectacular growth that they've had so far this year. People are going to realize that it's not Bitcoin price that drives their fundamentals. It's volatility in crypto, it's activity in crypto, in a variety of types of crypto assets. And we're going to find that out quarter by quarter.

The other thing we're going to find out is that they have a lot of sustainable growth. And they grow faster, really, than any other large cap by a mile. And as that happens quarter after quarter, they'll get the multiple that corresponds with that. If you think about the highest multiple stocks-- Snowflake, Zoom, Octa, CrowdStrike-- trading at 20 to 40 times revenue, Coinbase grows a lot faster than them, is more profitable than they are, and is trading at 8 times revenue. And so as they continue the fast growth rate, as it becomes more clear that it's not entirely dependent on crypto asset levels at crypto asset price levels, I believe the stock will perform very well.

AKIKO FUJITA: Gil, at what point does the overreliance on transaction fees become a risk for Coinbase? I know we talked about it-- this when the company went public. But there is a lot of competition there in that those like Robinhood who aren't necessarily charging fees. Has your case on that or argument on that changed at all?

GIL LURIA: Well, it's a very important caveat to Coinbase, is to realize that unlike those other fast growing companies that I just mentioned, Coinbase's growth is not going to be linear. Trading volumes are volatile, just like the asset prices are volatile. And so, there's going to be ups and downs a lot more than those other companies. And that's important to note. But in terms of the competitive positioning, they have a lot of competition.

But it's such a fast growing market. And they're clearly not losing share. Their share of assets in crypto is still increasing, not decreasing, even though Square's been in it for a while. Paypal's now in it. Robinhood is going to come in. Those are going to have a certain customer base that they're going to leverage. And that's great, but Coinbase has 56 million customers. They're not behind by any stretch of the imagination. And they'll continue to be able to have a leadership position in this market.

ZACK GUZMAN: And Gil, one last one from me when we think about maybe the longer term horizon for Coinbase because, you know, as we're talking about institutional investing there, it does seem like they're the name you trust. They're the ones you go to if you're putting millions of dollars on the line. You're going to go to a Coinbase.

But if we see some changes by the SEC in approving an ETF here, I wonder how much that might change the equation, maybe slow down the growth on the institutional side, relative to maybe some of those more savvy crypto investors who are all about owning their own keys and way more into getting into the weeds here on the crypto side, how you see that going maybe if the trigger is the SEC changing their minds.

GIL LURIA: Yeah, I think there's going to be a market for that. But I actually think it'll be more a retail investing market that's going to gravitate to the ETF. If I want to have a multimillion dollar position in crypto, I want to have a much better level of control of that than just owning the ETF.

So I'm more likely to have a relationship with either a Coinbase or a Grayscale in order to have that large of a position, which is what institutional investors are going to have. But the ETF will help. It'll help create another form of liquidity, another way for retail investors to be involved. And so, I do think that once the SEC gets around to it, I think they have a lot on their agenda. But once they get around to it, it'll be another positive push for the category.

ZACK GUZMAN: All right, DA Davidson Director of Research Gil Luria, I appreciate you hopping on here to chat with us today. Be well.