Coinbase IPO: $100 Billion listing, will the momentum continue for the crypto giant?

by Sandeep Kumar

Coinbase is a US-based cryptocurrency secure exchange that makes it easy to buy, sell, and store cryptocurrency like Bitcoin, Ethereum, etc. It offers products for both institutional clients and retail clients.The platform provides trading and storage services for 58 cryptocurrencies. Coinbase Prime is a platform dedicated to institutional clients. It also offers a debit Visa which enables clients to spend cryptocurrencies anywhere Visa is accepted.

Coinbase is going for a direct listing on Nasdaq under the ticker ‘COIN’. A direct listing is an alternative to an IPO, and it provides investors and employees the liquidity to their ownership stakes on the listing. This may not be beneficial for the company as no new capital is raised or shares are being issued. However,Coinbase will save millions of dollars in costs usually incurred in IPO.

 Snapshot

  • Founded: 2012
  • Notable Investors: Andreessen Horowitz,Paradigm,Ribbit Capital,Tiger Global, and Union Square Venture
  • HQ: San Francisco CA, United States
  • Total Funding: $847 Mn
  • CEO/ Management experience: Brian Armstrong is the co-founder and the Chief Executive Officer. Brian previously founded UniversityTutor.com. Fred is also co-founder and serves as managing partner at Paradigm (Crypto Fund).

Business Model

Coinbase makes money by charging fees for its brokerage and exchange services. In addition to the brokerage fees, Coinbase also charges variable spreads on purchases and trades. There is also a “Coinbase Fee” in addition to the spread and the cost of depositing money mentioned below in the chart. This fee is dependent on the value of the purchase, payment type (debit/credit), and region you are purchasing from. Customers can upgrade to Coinbase Pro for free after they have sufficient knowledge and experience.For advanced clients, Pro services offer research charts and more complex trading options.Company Highlights

Payment Method

Coinbase Fee

Bank Account

1.49%

Coinbase USD Wallet

1.49%

Debit/Credit Card

3.99%

ACH Transfer

Free

Wire Transfer

$10 ($25 Outgoing)

Crypto Conversion

2.00%

 Fee Structure at Coinbase

Competitive Advantage

Coinbase’s strategy has been to secure virgin markets by focusing on rapid customer volume growth, being the first to implement no fee forthe first $1 Mn of cashouts. This has been a great strategy leading to rapid customer growth.It also developed a pricing model that takes advantage of bitcoin price volatility by monetizing cashouts, which protect bitcoin users against volatility.

Over the years hacking has been one of the major risksleading to bankruptcyto many exchanges. Coinbase boasts an industry-leading security system to protect crypto assets and user data to avoid such ill fate. There has been no reported case of hacking for the company to date.

Market Sentiments

Coinbase is poised to list at a multiple of over 50x revenues.The market is bullish on Coinbase and the future of crypto assets. Crypto Assets have traditionally been highly volatile and have had multiple boom and busts in just one decade. Post the pandemic, the acceptance of crypto-asset has led to prices and trading volume rise exponentially with more acceptance by institutional investors, Coinbase on its part has also planned its listing when the market sentiment is at an all-time high with bitcoin touching a record ATH$60,000 and investors being super bullish on cryptocurrencies. The market is expecting the listing of Coinbase at a very high valuation of around $70Bn – $100 Bn.

Key Risks

  • In the past, there have been many security breaches and loss of crypto assets held by users ex: Mt. Gox. Such a catastrophe could adversely impact Coinbase’s brand and financial condition.
  • Cryptocurrency is highly regulatory and evolving and with many counties banning cryptocurrencies, any adverse regulation can be detrimental to the running of Coinbase.
  • The crypto market is highly innovative, the competition will further intensify in the future as existing and new competitors introduce new products or enhance existing products leading to lower revenues for Coinbase. Exchanges such as Binance, Kraken, Bybit, Bitmex, and Bitflyer have much larger trading volumes than Coinbase and differentiated products such as derivatives and crypto financing.

Financial Highlights

  • Total Revenue (2012-2020): $3.4 Bn
  • Revenue break-up: 96% – Transaction volume-based fee, 4% – Subscription products and services
  • Subscription and Services growing 126% YOY and more stable than the transaction-based fee.

Other Information

Coinbase has two classes of common stock, Class A common stock and Class B common stock. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. In the Listing, only the Class A of 114.9 Mn common stock is available.

  • Supports 90 crypto assets
  • Monthly Active Users: 2.8 Mn
  • Lifetime Trading Volume: $456 Bn
  • Total Assets on Platform: $90 Bn
  • Retail Users: 43 Mn, Institutional Investors – 7000

Market Opportunity

The Growth of Crypto Assets has grown at a CAGR of 195% over the last decade,the size of the market has hit $2 Tn in April 2021 and is poised to continue growing at an accelerated rate with increasing institutional and retail participation. Coinbase today has around 12% of the total crypto assets in its users’ wallets and will look to increase its market share.

Market Competitors

The Top 10 Crypto Exchanges have only ~25% Market Share, Overtime, Coinbase, and other big crypto exchanges will be leading market share gains at the expense of smaller players.

Valuation

The Valuation of Coinbase is in line with other fast-growing exchanges such as Robinhood at 56x revenue multiples. Being the first crypto exchange to be listed, there are no direct competitors to compare Coinbase with.Hence, we are using Robinhood which is a private startup and fast-growing with innovative products and services and has recently started providing a crypto exchange on its platform.

 

Being listed directly, there is a possibility of scarcity premium due to limited supply of Coinbase shares leading to higher valuations.

Valuation ($Bn)

Net Revenue ($Bn)

EV/Revenue

Robinhood 2020

40.0

0.7

58.8x

Robinhood 2021

80.0

1.4

57.1x

Coinbase 2020

68.0

1.2

56.7x

Coinbase 2021

100.0

1.2

77.0x

In the S-1 filing, Coinbase reported that the average share trading price was $343.58 in the private market in the Q1 of 2021 which is valued at $68 Bn. However, in the secondaries, the shares of Coinbase were trading at a valuation as high as $100 Bn, this would bring the multiple to around 77x multiples. Assuming an estimated 266.2 Mn outstanding shares, the shares are expected to trade in the range of $360 – $370. For now, 114.9 Mn shares have been registered to trade on the exchange.

Investing in Coinbase! Should you be cautious?

With investor sentiments at an all-time high, Investors looking for a quick buck can buy the shares during the direct listing and continue holding Coinbase as long as the crypto momentum continues. Long-term Investors however should understand that Coinbase fortunes are directly linked to the value of crypto assets. Expect the stock to be volatile and with some periods of under performance when crypto assets are in the bust phase. We recommend the investors to be optimistic about the long-term prospects of Coinbase but understand that there would be periods of under performance from time to time.

NFT: An Opportunistic Future or a Bubble?

by Sandeep Kumar

An NFT is an on-chain token of an off-chain asset. At the most bare-bones, it is a social contract between the asset creator and the surrounding community.

So, what makes it different from a crypto currency and what is this fuss about non fungibility. An NFT is a digital token that’s like a cryptocurrency but can’t be exchanged for another NFT. This is what makes it non fungible. A bitcoin for a bitcoin, but not one NFT for another. Each NFT is different and unique.

This token is added to a blockchain that supports this special ‘NFT type’ token (such as Ethereum) recording the details of ownership of some commodity, somewhat like how a house deed records the ownership of a house.

The only catch is the commodity, the off-chain asset, must be ownable and somewhat nonfungible. So, you can’t have an NFT on currencies or gold (non-fungibility), nor on Mars or Niagara Falls or the Mona Lisa (unless you own the Mona Lisa of course, then you can do whatever you want, also its highly likely won’t be reading this anyway).

Examples of NFTs Trades: 

  • Digital Art: The $590,000 selling of the famous Nyan Cat Gif, for example, could have only happened because of the meme’s enormous success over the years. 
  • Sports Collectibles: Similarly, the NBA’s highest-selling NFT was a highlight reel of LeBron James, which sold for $200,000. Less well-known players, on the other hand, had reels that sold for as little as $9.
  • Tweets: In March, Jack Dorsey’s original tweet sold for $2.5 Million, paving the way for more similar deals.

Why all this chatter on NFT then?

Because NFT allows storing more data per block. Bitcoin blocks allow only 1MB of data for example, just enough to record a bunch of transactions and some other details. 

This single feature elevates the NFT from more than just a ledger that records transactions (essentially what a cryptocurrency is) to record/store the ownership of pretty much anything such as jpeg files, music files, videos, internet domains, real estate, vintage cars, in-game purchases, art pieces, ad spaces, unlisted shares, horses, just anything.

So just to make things clear, if you are an artist, this is an easy way to monetize your work securely. NFTs also allow a share to the artist each time the NFT changes hands.

As a buyer, which you most likely are, you can buy NFTs of an autograph or highlight reels of an upcoming sports star that you think may strike it big. If in case that happens, it is likely the value of the NFT would have climbed manifolds.

Role of the community in guaranteeing NFTs

Unlike the fiat currencies that are legally backed by central banks, gold, governments and who knows what, a particular NFT only falls back on its scarcity to back it up (the other two tenets of an NFT are its utility and authenticity, both of which are not as effective as an NFTs scarcity is). The ploy of scarcity is a delicate one. The artist or NFT holder may not be able to enforce his ownership, may not get any special rights to own it, may very simply be fooled into buying that NFT or the creator may break its promise. It is the community however that enforces scarcity and hence values it. The creator of the NFT has no say in it.

The value of the NFT comes not from the NFT or the art or the off chain assets that it brings on the chain, it is the NFT and on chain assets’ community and its interactions that hold and/or derive value. It is not the NFT, but the community that is holding value. Most NFTs are worthless, but a few NFTs are focal points of creators and admirers both. Call it a digital bandstand or an art gallery if you wish. 

NFT “An Opportunistic Future”

  • NFT can be a new revenue stream for gaming, sports, art and technology.
  • Like Decentraland, NFTs can transform our attitudes toward ownership and make it possible to own a real-world asset that’s thousands of miles away.
  • Many crypto unknowns could introduce cryptocurrencies for the very first time through NFTs.

Risk associated with NFT

  • It may end up like the initial ICO (initial coin offering) craze as people’s attention shifted to other technology and the space cooled down.
  • What may seem like a hot commodity today may not be as so in the future as seen in the case of Jack Dorsey’s tweet.  
  • Complaints of several pieces of art being stolen and purchased as NFTs leaving the original art creators with no proof of their work.
  • NFT owners must also trust that the maker will not produce another batch of tokens with nearly identical artwork, devaluing the NFT they paid for.

Why the craze of NFT holds despite the associated risk? 

NFTs can be called collectibles. People buy paintings or any other kind of physical art for the same purpose. Utility, authenticity, and scarcity are typically the driving factors behind their demand. 

The obvious one is utility. People are willing to pay for an NFT ticket because it helps them to attend a meeting. Alternatively, they are more likely to purchase art if they can view it in a virtual environment. They’re also willing to spend money on an object that gives them unique abilities in a game. The definition of authenticity explains how an NFT works. What was the source of it? Who has owned it previously? Finally, Leonardo Da Vinci’s famous painting “The Mona Lisa” better describes scarcity. There may exist millions of copies, yet there’s only one original Mona Lisa.

The big player of the NFT market

OpenSea is the first and largest marketplace for user-owned digital goods, which include collectibles, gaming items, domain names, digital art, and other assets backed by a blockchain-based in New York. The number of unique participants after the bubble of 2018 has grown steadily from 8,500 accounts in February of 2018 to over 20,000 accounts in December of 2019. The market is driven by a core group of power users. On OpenSea, the median seller has sold $71.9 worth of stuff, whereas the average seller has sold $1,178 worth of stuff, indicating a large number of power sellers.

Market sentiments and perception

The market for non-fungible tokens is quite small (yet). It is also harder to measure than cryptocurrencies due to the lack of spot prices. Focussing only on secondary trading volume (peer-to-peer sales of NFT, not the creation of NFTs) as an indicator of market size the current secondary market is expected to be roughly $2 – $3 Million USD in volume per month on average.

The total trading volume of non-fungible token (NFT) artwork hit an all-time high of $8.2 Million in December 2020 compared to $2.6 Million in November 2020.

It might sound like a gold rush right now, but the main question is how long will value be produced in all of these new forms if the supply is unlimited? And what would be the most prudent position to take?  A good way to get a piece of the action, yet to stay unharmed is to service the bubble, not to take part in it. Case in point: do now what Levi’s or Wells Fargo did then. NFTs will tokenize everything. It won’t be long before off chain assets get on the blockchains. All valuable assets will then be stored on a decentralised digital ledger, with the NFT being a token of digital representation of an object or person on the chain.

SPAC – Building a Bubble of Uncertainty

by Sandeep Kumar

SPAC popularity has quadrupled in the past year or two and is bringing a new wave in the investment sector, especially the celebrity engagement in the world SPAC worked as the icing on the cake. This uncertain bubble is growing huge, as the bubble of uncertainty.

Overview

SPAC named as Special Purpose Acquisition Companies was developed to avoid the old lengthy and costly way of moving with a traditional IPO process. But now it is getting misused to bring up incompetent companies to go public which does not have the necessary requirements to become public under any circumstances. The goal is to bring in capital and deposit into an interest-bearing trust account, the SPAC aims to buy an established privately owned corporation through a “business combination.” After a SPAC raises funds, it usually has two years to make an investment, with the possibility of an extension if enough SPAC stockholders vote to do so. If the SPAC is unable to reach an agreement within that time frame, it is required to refund the money to its investors, and the SPAC’s sponsor forfeits any initial investment. The investors have no clue about the company getting acquired.

Now Let us take a moment back and think, will you ever give a blank check to someone without knowing where is it getting spent. How many of us will do that? hopefully none. This is exactly what is done in SPAC and that is why it is called blank check companies. The investors pay without knowing and analysing as there is almost no way to perform a distinctive calculation to understand about the acquisition as there is no prior announcement of acquisition.

Risk from an Investor’s Perspective

Under securities law, only past financial statements can be disclosed in standard IPOs. SPACs, on the other hand, will use forward-looking forecasts to market the business mix. For fast-growing but not yet profitable businesses, being able to present forecasts will help them tell their story to investors. If you are an investor, then you know what happens when a bubble bursts.

Let us take a basic example and understand, if you could buy SPAC shares for $10 and then get approximately $10 back, what you’ve lost is the chance to put the money to better use elsewhere. If you as an investor, on the other hand, do not participate in the SPAC IPO. Instead, if you purchase stock on the open market, let’s take SPAC shares have been trading 50 percent to 75 percent above their IPO prices in recent months, even before they name an acquisition target. You won’t get your $15 back in liquidation if you buy a SPAC for $15 per share and it never makes a deal. You’ll get $10, which is a 33% loss. Akazoo, an AI music streaming company that was expected to merge with Modern Media Acquisition Corp in 2019, may be the most unfortunate of the failed SPACs. Instead, it was revealed that Akazoo’s previous management had falsified the books and records to a significant degree, effectively nullifying their claimed 5.5 million subscribers.

This is not new in case of SPACs. Despite this let us go through the celebrity industry involvement in SPAC making it even more popular sports figures Alex Rodriguez and Shaquille O’Neal, former house speaker Paul Ryan and the list is goes on. The count moves to 474 SPACs raising $156 Bn. After investing your hard earned wealth what you get is Ambiguous valuations, questionable disclosures and a misalignment of interests. SPAC is making the people minting SPACs rich and giving a hope to the investors to get rich later without a basis but a promise of gamble. It is often seen that the SPAC sponsor tends to wash off their hands by selling off their part of shares, as an investor what do you think is the confidence level that is getting reflected where the SPAC Sponsor sells off his part leaving other is dismay. The actual purpose of SPAC is getting diluted and is becoming a tool to just skipping the IPO process and going public with litigation risk is present as recent cases have demonstrated.

See, for example, Bogart v Israel Aerospace Indus., Ltd. (standing of SPAC sponsor to bring a claim for breach of duty to act in good faith); Rufford v. Transtech Serv. Partners, Inc. (challenge to fees being paid to SPAC sponsor); Welch v. Meaux (alleged securities fraud in connection with SPAC business combination); and Olivera v. Quartet Merger.Corp. (SPAC shareholder suing SPAC for failure to honour his redemption right). CEC Entertainment (owner of Chuck E. Cheese and Peter Piper Pizza) and Leo Holdings declined to combine in 2019. CEC executives gave no specific reason for the termination, but they did lose out on a $1.4 billion contract. Since then, the company has applied for Chapter 11 bankruptcy protection.

Performance of SPACs : The Numbers Game

Now let’s bring in numbers which is the ultimate factor for investors from August 2020, the 56 SPACs studied outperformed the S&P 500 by an average of 11 percentage points in the first three months following an acquisition, but lagged the broader market in the 12 months following the transaction. According to a separate study, SPACs under consideration that went public since 2015 have lost an average of 18.5 percent, with median returns of -36.1% compared to a 37.2 percent increase for typical IPOs. Table below consists of the recent SPAC (with definitive agreement) performance.

Name

Commons Price

% Change wrt 08/03/2021

Unit Price

Warrant Price

Colonnade Acquisition Corp.

$10.47

-12.97%

$13.45

$2.54

Alussa Energy Acquisition Corp

$10.49

-4.03%

$12.09

$2.22

Aspirational Consumer Lifestyle Corp.

$10.30

-4.01%

$10.95

$1.70

FTAC Olympus Acquisition

$10.47

-3.24%

$11.17

$2.27

10X Capital Venture Acquisition Corp

$10.33

-2.55%

$11.23

$1.57

Thunder Bridge Acquisition II

$10.36

-2.36%

$11.98

$1.99

NavSight Holdings, Inc.

$10.43

-2.16%

$11.05

$1.64

Vesper Healthcare Acquisition Corp.

$10.25

-2.01%

$10.80

$2.15

NextGen Acquisition Corporation

$10.31

-1.62%

$11.03

$2.12

Starboard Value Acquisition Corp.

$10.05

-1.57%

$10.26

$1.71

TPG Pace Tech Opportunities Corp.

$10.26

-1.25%

$10.71

$1.36

Fusion Acquisition

$10.37

-1.24%

$11.30

$1.56

Altimar Acquisition Corp

$9.95

-1.09%

$10.42

$1.57

Fortress Value Acquisition Corp. II

$10.07

-0.98%

$10.38

$1.40

Forum Merger III Corporation

$10.20

-0.97%

$10.88

$2.05

 

It is not surprising as a bubble when it grows beyond a limit it will burst. It might sound like a normal fact when I say Dozens of SPACs are trading below $10 at which the shares were sold assuming they are yet to announce their deals, but surprisingly many SPACs started trading at large premium to their cash holding, like Churchill Capital Corp.IV traded at $64 even before its deal with Lucid Motors Inc, which is a highly unlikely behaviour but it shares has fallen by 60% since then.  To continue the discussion let us look into the former financial disappointments by SPACs, one of the prominent example that comes to the mind is the case of Nikola Corp. so called rival of Tesla, which was targeted by Hindenburg announced that it would produce fewer than 20% of the electric trucks it has planned.

Based on our analysis all the forecasts made was turned into scraps, a complete financial disappointment. If that was not enough let’s see the case of Quantumscape Corp. and Hyliion Holdings Corp., former SPACs, have already lost 2/3rd of their value after attaining peak last year. The performance of SPAC post-merger is often disappointing.

Investors Beware

Let us see the upcoming facts in the world of SPAC, there were nearly 250 special purpose acquisition companies, or SPACS, that raised more than $83 billion in 2020, with an average size of $334 million. So far this year, 75 people have been counting. Walmart Inc.’s Flipkart is reportedly exploring going public in the U.S. through a merger with a SPAC as it aims to fasten the listing process, also E-commerce players like Grofers also are exploring ways to go public through SPAC. Now see the example and look from a investors prespective, it has a revenue of around 34 million USD, showing a increase of 54% in income but also has a 74.4% year on year increase in loss. Its revenue is no way even near to 100 million but is going public with presenting a forecast of growth in future. Would you Invest in it?.

It is an obvious fact that it can no way follow the traditional IPO method so coming in through the SPAC. Don’t you think SPAC is increasingly becoming a loophole rather than an effective tool of reducing the tedious process of traditional IPO. It should be conclusive of the fact that investors shall be beware and should examine and analyse whenever it comes to the point of investing in a SPAC before thinking it to be a highly profitable investment in near future, otherwise you may end up losing money. Fate of a bubble on growing beyond the threshold is inevitable.

Keep up to date with the latest research

Coinbase IPO: $100 Billion listing, will the momentum continue for the crypto giant?

by Sandeep Kumar

Coinbase is a US-based cryptocurrency secure exchange that makes it easy to buy, sell, and store cryptocurrency like Bitcoin, Ethereum, etc. It offers products for both institutional clients and retail clients.The platform provides trading and storage services for 58 cryptocurrencies. Coinbase Prime is a platform dedicated to institutional clients. It also offers a debit Visa which enables clients to spend cryptocurrencies anywhere Visa is accepted.

Coinbase is going for a direct listing on Nasdaq under the ticker ‘COIN’. A direct listing is an alternative to an IPO, and it provides investors and employees the liquidity to their ownership stakes on the listing. This may not be beneficial for the company as no new capital is raised or shares are being issued. However,Coinbase will save millions of dollars in costs usually incurred in IPO.

 Snapshot

  • Founded: 2012
  • Notable Investors: Andreessen Horowitz,Paradigm,Ribbit Capital,Tiger Global, and Union Square Venture
  • HQ: San Francisco CA, United States
  • Total Funding: $847 Mn
  • CEO/ Management experience: Brian Armstrong is the co-founder and the Chief Executive Officer. Brian previously founded UniversityTutor.com. Fred is also co-founder and serves as managing partner at Paradigm (Crypto Fund).

Business Model

Coinbase makes money by charging fees for its brokerage and exchange services. In addition to the brokerage fees, Coinbase also charges variable spreads on purchases and trades. There is also a “Coinbase Fee” in addition to the spread and the cost of depositing money mentioned below in the chart. This fee is dependent on the value of the purchase, payment type (debit/credit), and region you are purchasing from. Customers can upgrade to Coinbase Pro for free after they have sufficient knowledge and experience.For advanced clients, Pro services offer research charts and more complex trading options.Company Highlights

Payment Method

Coinbase Fee

Bank Account

1.49%

Coinbase USD Wallet

1.49%

Debit/Credit Card

3.99%

ACH Transfer

Free

Wire Transfer

$10 ($25 Outgoing)

Crypto Conversion

2.00%

 Fee Structure at Coinbase

Competitive Advantage

Coinbase’s strategy has been to secure virgin markets by focusing on rapid customer volume growth, being the first to implement no fee forthe first $1 Mn of cashouts. This has been a great strategy leading to rapid customer growth.It also developed a pricing model that takes advantage of bitcoin price volatility by monetizing cashouts, which protect bitcoin users against volatility.

Over the years hacking has been one of the major risksleading to bankruptcyto many exchanges. Coinbase boasts an industry-leading security system to protect crypto assets and user data to avoid such ill fate. There has been no reported case of hacking for the company to date.

Market Sentiments

Coinbase is poised to list at a multiple of over 50x revenues.The market is bullish on Coinbase and the future of crypto assets. Crypto Assets have traditionally been highly volatile and have had multiple boom and busts in just one decade. Post the pandemic, the acceptance of crypto-asset has led to prices and trading volume rise exponentially with more acceptance by institutional investors, Coinbase on its part has also planned its listing when the market sentiment is at an all-time high with bitcoin touching a record ATH$60,000 and investors being super bullish on cryptocurrencies. The market is expecting the listing of Coinbase at a very high valuation of around $70Bn – $100 Bn.

Key Risks

  • In the past, there have been many security breaches and loss of crypto assets held by users ex: Mt. Gox. Such a catastrophe could adversely impact Coinbase’s brand and financial condition.
  • Cryptocurrency is highly regulatory and evolving and with many counties banning cryptocurrencies, any adverse regulation can be detrimental to the running of Coinbase.
  • The crypto market is highly innovative, the competition will further intensify in the future as existing and new competitors introduce new products or enhance existing products leading to lower revenues for Coinbase. Exchanges such as Binance, Kraken, Bybit, Bitmex, and Bitflyer have much larger trading volumes than Coinbase and differentiated products such as derivatives and crypto financing.

Financial Highlights

  • Total Revenue (2012-2020): $3.4 Bn
  • Revenue break-up: 96% – Transaction volume-based fee, 4% – Subscription products and services
  • Subscription and Services growing 126% YOY and more stable than the transaction-based fee.

Other Information

Coinbase has two classes of common stock, Class A common stock and Class B common stock. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to twenty votes and is convertible at any time into one share of Class A common stock. In the Listing, only the Class A of 114.9 Mn common stock is available.

  • Supports 90 crypto assets
  • Monthly Active Users: 2.8 Mn
  • Lifetime Trading Volume: $456 Bn
  • Total Assets on Platform: $90 Bn
  • Retail Users: 43 Mn, Institutional Investors – 7000

Market Opportunity

The Growth of Crypto Assets has grown at a CAGR of 195% over the last decade,the size of the market has hit $2 Tn in April 2021 and is poised to continue growing at an accelerated rate with increasing institutional and retail participation. Coinbase today has around 12% of the total crypto assets in its users’ wallets and will look to increase its market share.

Market Competitors

The Top 10 Crypto Exchanges have only ~25% Market Share, Overtime, Coinbase, and other big crypto exchanges will be leading market share gains at the expense of smaller players.

Valuation

The Valuation of Coinbase is in line with other fast-growing exchanges such as Robinhood at 56x revenue multiples. Being the first crypto exchange to be listed, there are no direct competitors to compare Coinbase with.Hence, we are using Robinhood which is a private startup and fast-growing with innovative products and services and has recently started providing a crypto exchange on its platform.

 

Being listed directly, there is a possibility of scarcity premium due to limited supply of Coinbase shares leading to higher valuations.

Valuation ($Bn)

Net Revenue ($Bn)

EV/Revenue

Robinhood 2020

40.0

0.7

58.8x

Robinhood 2021

80.0

1.4

57.1x

Coinbase 2020

68.0

1.2

56.7x

Coinbase 2021

100.0

1.2

77.0x

In the S-1 filing, Coinbase reported that the average share trading price was $343.58 in the private market in the Q1 of 2021 which is valued at $68 Bn. However, in the secondaries, the shares of Coinbase were trading at a valuation as high as $100 Bn, this would bring the multiple to around 77x multiples. Assuming an estimated 266.2 Mn outstanding shares, the shares are expected to trade in the range of $360 – $370. For now, 114.9 Mn shares have been registered to trade on the exchange.

Investing in Coinbase! Should you be cautious?

With investor sentiments at an all-time high, Investors looking for a quick buck can buy the shares during the direct listing and continue holding Coinbase as long as the crypto momentum continues. Long-term Investors however should understand that Coinbase fortunes are directly linked to the value of crypto assets. Expect the stock to be volatile and with some periods of under performance when crypto assets are in the bust phase. We recommend the investors to be optimistic about the long-term prospects of Coinbase but understand that there would be periods of under performance from time to time.

Wall Street’s dream week, crazy week for the IPO market

by tradmin

“U.S. IPOs are having a busy week as 21 companies are expected to price their offerings raising more than $10 billion combined in the coming weeks.”

23 new IPOs were listed at NYSE and Nasdaq combined, making it one of busiest week in Wall street in last few years. Wall street is for visionaries, people who can look forward and measure up the market moves. It’s not for people Reminiscing the past and wallowing in its sorrow. Corona pandemic was past and the recovering economy, potential successful vaccine and rising sentiments among investors are already showing signs. Wall street has always been front runner and rightly so. The last week has seen crazy amount of IPO activity in the market and many more billion-dollar companies are soon to follow.

Snowflake’s share soared on the first day of trading with its valuation doubled from $33 Bn to over $70bn, making its initial public offering the largest ever for a software firm. Snowflake is a cloud computing company, that went public on NYSE on 16th Sep 2020 and raised $3.36 Bn. The overenthusiasm among the investors pushed the first day trading price to $245 — more than double its IPO price — in New York trading. Multiple VC and early stage investors have been able to mint billions of dollars from the IPO. The share got additional traction after the investment interest from Ventures and Berkshire Hathaway.

JFrog a DevOps software development company also went public on 16th Sep 2020 with IPO priced at $44 raising $509 Mn at the company valuation of just about $4 Bn. By end of the day JFrog’s stock soared 47.3%, closing at 64.79. JFrog was reportedly valued at $1.5 billion last year and IPO provided a huge valuation boost to the company. The soaring valuation of the company shows how much the investors are willing to pay for high growing SaaS company.

Unity Software went public with a blockbuster IPO this Friday, with its price jumping 44% by the end of the day. The company raised proceeds of around $1.3 Bn by selling 25 million shares at $52. Its stock raised as high as $76 in early day trading lifting company’s valuation to around $20 Bn. Unity is world famous gaming development studio that is known for hits such as “PokemonGo”, “Call of Duty:mobile” etc. Unity expected its IPO price to be round $34 – $42, but the enthusiasm about the stock among the public helped company go with IPO at $52. Sequoia Capital and Silver Lake were the biggest investors in Unity before the IPO, with Sequoia owning more than 24 per cent. Unity reported loss of $54 Mn this year, even though its revenue is on the rise, reporting $351 Mn earnings last year, 39% up from previous year. Gaming is the fastest growing segment in media category with 2.5 billion gamers worldwide and $140 Bn in revenue which is also consistently rising exponentially.

Sumo Logic: Sumo logic was the third venture backed software company listed this week, on 17th Sep 2020, on the exchange with the price above its anticipated range. The company raised $326 Mn with shares priced at $22, with the day closing at 26.8 a 22% jump in the closing price. Sumo logic is pioneer in continuous Intelligence with applications across digital transformation, cloud computing and analytics. Sumo like many others going public this week has shown solid revenue growth but also equitably growing losses. But the multiple times oversubscription of the company shares and the rising stock price shows the confidence investors have on the company and its growth potential.

Investors are bullish on the market and wall street is riding on the positive wave. Past few weeks have seen strong IPO activity after a long dull period, with 23 new IPO listed on NYSE and Nasdaq just this week. List of IPO listed during this week:

Billions of dollars have changed hands with number of VCs and early stage investors making big exits. Just a month ago when the companies were worried sick about corona and its potential impact on the investments and their portfolio, last few weeks have seen a complete shift in scenario. Sequoia a leading VC was largest owner of Unity, had 8.4% stake in Snowflake and some ownership in Sumo Logic had around $9 Bn worth in these three companies, earning health profits with exits. Many other investors have seen a profitable run and the IPO fever is not expected to end any time soon.

Whatever be the reason, be it the recovering economy from the pandemic, be it the strengthening investor sentiment or be it the escape from the future political uncertainty from elections IPO market is up and running. U.S. IPOs are having a busy week as 21 companies are expected to price their offerings raising more than $10 billion combined in the coming weeks. 

What is the motivation behind Torre Capital?

by tradmin

“We built this platform to create a differentiated experience, and that is what we are going to provide.”

In my erstwhile career as a Digital Consultant with first Accenture Digital and then Mckinsey, I have had the privilege of building Digital Banks and Fintech platforms from scratch. There were two key takeaways I had from all these experiences put together:

Digital channels, if used efficiently, could transform the customer experience by offering better products at a much lower price point by eliminating useless intermediaries.

By the time any financial instrument reaches retail hands, a large portion of the profit pool has already been siphoned off. It is a rather simplistic but fairly accurate argument that institutions benefit from early access to investments, which at a later stage gets distributed to unsuspecting retail investors.

I went looking for a white space in the finance industry armed with these two hypotheses, and soon found one.

Over a period of six months from January 2020 – June 2020, I personally spoke to over 200 High net-worth investors and about 50 family offices across 5 APAC countries. The entire group had a few complaints and requirements:

Issues with current wealth managers:

If they didn’t offer their entire portfolio to one private bank, they wouldn’t take them seriously. Anything short of double digits, and you won’t get the advisory or access you need

Mostly unsure on how much trust to place on their Relationship Managers.

High and opaque fee structure which made returns look ordinary.

What do they really want:

Institutional Access to exclusive products that helped enhance portfolio returns but without the potential of steep drawdowns. Not equity baskets or mutual funds that everyone else is offering under the garb of managed AUM or roboadvisory.

Clear and unambiguous understanding of products on offer. No opaque language or unnecessary jargon

Clear and transparent pricing that doesn’t try to fleece at the cost of returns. No kickbacks to funds or investment managers

An easy self-directed process to invest using digital channels rather than being chased by Relationship managers

Support who is readily available and knowledgeable to answer queries, handhold during the investment process. But no hard sell or repeated follow-ups

Ergo! Torre Capital

We built Torre Capital with the sole intent of providing a platform that looks out for investor interests before anything else.

We bring our investors access to asset classes at low minimums so that they can invest even with modest portfolios. We do with only the top decile of funds and startups and other assets that have an excellent track record of protecting and growing investing principal. And we do this at AUM fees that are 5x lower than traditional players.

We currently bring you access high quality Private Equity Funds, Venture Capital Funds, and Pre-IPO startups. Create a login in 2 minutes to check out the available opportunities.

Why should you care as an investor for private markets?

Better Returns and lower volatility

In multiple articles that follow on this blog as well as my LinkedIn profile, I will demonstrate how returns in PE/VC/Pre-IPO opportunities are calculated and why they make sense. For now, I will borrow from Bloomberg and Goldman Sachs to illustrate the point. They looked at overlapping data for hedge funds, private equity and real estate 1990 to September 2017. A traditional 60/40 portfolio of U.S. stocks and bonds — as measured by the S&P 500 Index and the Bloomberg Barclays U.S. Aggregate Bond Index — returned 8.2 percent annually during that period, including dividends.

Adding a 10 percent allocation to each of the three alternative investments — as represented by the HFRI Fund Weighted Composite Index, the Cambridge Associates US Private Equity Index and NCREIF Fund Index Open-End Diversified Core Equity, respectively — would have added 0.7 percentage points a year. And thanks to hedge funds’ ability to short stocks and the fact that private assets aren’t subject to the whims of public markets, adding alternatives would also have resulted in smaller declines during each of the last two bear markets.

Our promise

We built this platform to create a differentiated experience, and that is what we are going to provide. As investors, you can be assured of:

We will never recommend an investment that we would not put our own money in. None of our team members have a revenue or fee income target, the only target they have is to make sure that we protect our investors’ faith at all costs

We will not push products, we will put the facts in front of you as transparently possible, and answer your queries as needed. But ultimate investments decision remains with you.

Unlike every other fund out there we do not charge any fees on committed capital. You pay when you invest and start earning. Or else you pay nothing.

We will not build hidden fees in asset prices. All fees are transparent and upfront. We would rather see you walk away than feel cheated at any point of our interaction

And it begins!

The word Torre means tower, or watchtower in Spanish. While you progress in your careers, we will make sure your money works as hard as you do, and that is always protected in the best manner possible.

Reach out to me at [email protected] 24*7 and I guarantee a response within 24 hours (not working hours!). As we work to expand and better our offering for your investing pleasure, please feel free to send across your feedback and comments.

Palantir Pre-IPO Analysis

by tradmin

Listing gains are likely to be capped by reputation concerns around an otherwise enviable product stack

Palantir IPO: Exercise extreme caution, may not be as smooth sailing as other recent tech IPOs

We believe that Palantir might continue to make winning bids for government contracts and maintain/increase its revenue share. However, future growth and share price will be driven by Palantir’s ability to acquire and grow large corporate customers, and not govt. contracts.

Palantir has not seen a single year of profits since inception 17 years ago. It is not clear to us how this situation will change in the coming year.

We firmly believe that their data mining software is industry leading. But we’re not convinced that this alone is enough for widespread corporate consumption.

Palantir has the first-mover advantage to offer specialised, customer-specific, use-case data analytics software. It needs to become price competitive to capture market share.

Given the negative public image and governance concerns, we don’t think Palantir would repeat the success of a Snowflake or Unity. Listing gains maybe limited, long term investors may want to back the company.

The success of Foundry- Palantir’s enterprise SaaS platform will be the primary driver of its growth. However, in the near term, it will be out shadowed by its negative public perception and unethical use of private data. The stock is likely to underperform, atleast compared to more straight forward SaaS companies. Download the report for an in-depth analysis of this tech giant.

“Listing gains are likely to be capped by reputation concerns around an otherwise enviable product stack”

Palantir IPO: Exercise extreme caution, may not be as smooth sailing as other recent tech IPOs

  • We believe that Palantir might continue to make winning bids for government contracts and maintain/increase its revenue share. However, future growth and share price will be driven by Palantir’s ability to acquire and grow large corporate customers, and not govt. contracts.
  • Palantir has not seen a single year of profits since inception 17 years ago. It is not clear to us how this situation will change in the coming year.
  • We firmly believe that their data mining software is industry leading. But we’re not convinced that this alone is enough for widespread corporate consumption.
  • Palantir has the first-mover advantage to offer specialised, customer-specific, use-case data analytics software. It needs to become price competitive to capture market share.
  • Given the negative public image and governance concerns, we don’t think Palantir would repeat the success of a Snowflake or Unity. Listing gains maybe limited, long term investors may want to back the company.
    The success of Foundry- Palantir’s enterprise SaaS platform will be the primary driver of its growth. However, in the near term, it will be out shadowed by its negative public perception and unethical use of private data. The stock is likely to underperform, atleast compared to more straight forward SaaS companies. Download the report for an in-depth analysis of this tech giant.

The Pre-IPO Startup Equity Market

by tradmin

“Listing gains are likely to be capped by reputational concerns around an otherwise enviable product stack”

Palantir IPO: Exercise extreme caution, may not be as smooth sailing as other recent tech IPOs

We believe that Palantir might continue to make winning bids for government contracts and maintain/increase its revenue share. However, future growth and share price will be driven by Palantir’s ability to acquire and grow large corporate customers, and not govt. contracts.
Palantir has not seen a single year of profits since inception 17 years ago. It is not clear to us how this situation will change in the coming year.

We firmly believe that their data mining software is industry leading. But we’re not convinced that this alone is enough for widespread corporate consumption.
Palantir has the first-mover advantage to offer specialised, customer-specific, use-case data analytics software. It needs to become price competitive to capture market share.
Given the negative public image and governance concerns, we don’t think Palantir would repeat the success of a Snowflake or Unity. Listing gains maybe limited, long term investors may want to back the company.

The success of Foundry- Palantir’s enterprise SaaS platform will be the primary driver of its growth. However, in the near term, it will be out shadowed by its negative public perception and unethical use of private data. The stock is likely to underperform, atleast compared to more straight forward SaaS companies. Download the report for an in-depth analysis of this tech giant.

Will the DJI Drone IPO finally take off in 2021?

by tradmin

“DJI is likely to continue its pole position in the drone market for the near future with better technology, a large product stack, and a competitive manufacturing setup.”

DJI Innovations is evaluating an IPO in mainland China and Hong Kong in early 2021. In this article, we evaluate the merits of the world’s large drone manufacturing company and what investors can expect from its IPO.

A Chinese company that produces commercial and recreational unmanned aerial vehicles (UAVs). Its product line covers the high-end UAV flight control system and ground control system, professional film and TV aerial photography platform, top commercial gimbal system, high-definition long-range digital video transmission system, professional-level wireless remote control and imaging terminal as well as intelligent model aircraft products and high-precision control module which are widely applied to flying toys.

Overview

DJI is the market leader with a 74% market share in the global drone market which is growing at 19.41% CAGR. DJI is currently offered at a valuation of $18Bn USD and expected to IPO in 2021 at $24Bn USD (current discount 25%). DJI’s core business is strongly poised with an excellent value proposition to its clients – ranging from photography, agriculture, risk detection, racing to hobbyists. It has a market holding strategy of low price and high volume to keep competition at bay. However, it faces headwinds in the form of high risk from government regulations including a potential ban in the USA due to data hijacking risks. Another major risk is the development of open-source flight control platforms, which might ignite a fierce price war in the drone industry.

Snapshot

Founded: 2006
Notable Investors: Accel Partners and Sequoia Capital
Headquarters: Shenzhen, China
Total Funding: $155 Mn
Chief Executive Officer: Frank Wang
General Manager, SF; Director, Aerial Imaging: Eric Cheng

The Secret of Success?

Market Share: China’s DJI possesses a 74% market share of the global consumer drone market. It was valued at $15 Bn in 2018 during its last fundraising round, ranking it among the top tech unicorns worldwide. The drone market itself is growing at an exponential CAGR of 19.4%.

Value Proposition: DJI offers drones with a wide variety of features, and at various price points to capture as much of the consumer market as possible. They have also vertically integrated drone manufacturing and own stakes in various key component suppliers, such as a majority stake in their drone camera supplier Hasselblad. This helps keep costs lower than any other player in the industry.

Continued R&D: In 2016, DJI internally incubated the team Livox that focuses on R&D of LiDAR sensors for high-speed self-driving and industrial robotics. As the range and image sensors are essential for drones as well, DJI has been working on similar technologies for years, thereby helping easy technology migration for the vehicle LiDAR. Besides, due to differentiated design, Livox LiDAR is tens of times cheaper than the ones manufactured by the US-based company Velodyne. DJI is known for continuous and relentless innovation and most of the competition is quite behind when it comes to drone technology.

High Volume and Low Price Point Strategy: the firm aims for profit margins in the low single digits to ensure competitors cannot offer a similar drone at a lower price point. The fruit of the company’s early start and commitment to cost control show in their manufacturing prowess. DJI consumer-level quadcopters have been outperforming their competitors in terms of drone size, stability, image quality, and battery life since the release of its Mavic pro series in 2016.

Strategic Partnerships: DJI has collaborated and created distribution agreements with many companies worldwide, including the Apple store since 2015 for its Phantom series and later the Mavic series making its products accessible to all consumers. These moves have improved brand awareness and allowed DJI to reach more consumers than the competition.

Industrial integrations: DJI has enhanced its integration capabilities by partnering with industry giants for niche capabilities:
Microsoft has integrated Azure IoT Edge and Azure Cloud with DJI drones to streamline the secure deployment of DJI drone squads. Also, DJI Manifold 2 has now been approved for Azure IoT Edge, making it easier for companies to deploy AI frameworks on computers. FLIR Systems has launched the MUVE C360, the first multi-gas detector completely integrated with the DJI Matrice 210 drone, which will change the way emergency response teams treat toxic, industrial, and environmental accidents by offering a new level of protection, significantly minimizing time to action.

Future-ready product stack: DJI Drone technology helps companies and organizations around the world save time and money and increase the safety of employees in myriad industries. DJI focused on providing easy-to-use drones to farmers, agronomists, and stewards to help maintain their land in a more productive and environmentally sustainable manner, while also ensuring that emergency responders need assistance to respond effectively and save lives during natural disasters.

P4 Multispectral drone: the world’s first fully-integrated multispectral imaging drone designed to power next-generation agriculture and allow more effective land-use environmental management.

Agras T16 drone: The global launch of DJI’s leading spray drone for agricultural applications that makes it easy to apply liquids such as fertilizers and pesticides specifically to field crops and orchards.

DJI Disaster Relief Program: A new initiative to rapidly equip first responders with DJI drone technology and support during natural disaster response and recovery missions for wildfires, hurricanes, floods, tornadoes, and earthquakes.

Diverse client base: Caters to a diverse clientele in the industry from government to agri-businesses. Easily accessible to varied users such including hobbyists and professional photographers. They have expanded into racing drones for the gamers and even drones that carry people.

Key Risks

The US government may blacklist DJI for potential data threats. USA is DJI’s second-largest market. With rising geopolitical tensions, the situation might get worse, endangering approx. 40% of total revenues.

The American Drone Security Act is just around the corner, if passed it would mean that all federal agencies using Chinese drones, such as the Department of Justice and the Department of the Interior, would have 180 days to avoid using and purchase them. In other words, the police, fire departments, traffic controllers, and several others could lose their drone fleets and have to find other suppliers or give up using drones.

Big firms such as Intel and Qualcomm are making significant investments and waiting for opportunities to replace DJI as the top drone player. Competitive intensity is likely to increase going forward, especially in niche areas.

The development of open-source flight control platforms might ignite a fierce price war in the drone industry.

The CEO of DJI Frank Wang predicted that the company’s revenue would hit a ceiling of USD 3 billion as it already dominates the overall drone market.

The most problematic factor for the consumer drone market in it is the local market is evolving government regulations around the use of drones. As per Chinese regulations, only UAVs that weigh under 250 grams is not required to be filed with the local government. The current government regulation on consumer drones limits the functions of miniature drones and likely to restrict sales going forward.

The US Army has raised security issues as it believes that DJI can capture location, audio, and even visual data from consumer flights. The US Army is worried about the widespread exposure to data hijacking as drones might end up disclosing comprehensive knowledge about military activities, given that DJI is a Chinese business.
How justified are the current valuations?

The last reported market valuation for DJI drones was $15 Bn as per the latest round of funding in April 2018. Based on current market news, DJI is likely to launch its IPO with a minimum valuation of $24 – $27 Bn. Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 4.77x – 6.15x which gives us an intrinsic valuation range of $9.54 Bn to $12.3 Bn.

Due to its colossal size and market share, it’s difficult to compare it with any other drone company which has a similar size or business growth potential, however, we have compared it to publically traded companies GoPro, Parrot Drones, and Plantronics.

 

 Table: Financial performance of DJI compared to its competitors

Financial Highlights

Revenue: DJI has experienced very strong revenue growth in the past years and trends continue to remain very robust. With two product launches in the past six weeks and over 70% market share, revenues were up by 60% year-to-year growth at $2,000.6 Million and a profit margin of 26.17%. 

Fraud: Back in 2018, some of the employees had been inflating the cost of parts and materials for financial gain. DJI dismissed several employees, alerted law enforcement, and immediately set-up renewed internal channels for whistleblowers to report fraud. The amount of losses from the fraud is approximately around 1 Bn Yuan i.e. $150 Mn USD.

Competitors

GoPro: GoPro is an American company that is engaged in designing and providing cameras, mounts, drones, and appliances. The company outsources a part of manufacturing to third parties in China. GoPro has a global presence, including Europe, the Middle East, Africa, and Asia-Pacific, with the Americas contributing over half of the total revenue. It raised $427 Mn in its initial public offering on the NASDAQ stock exchange under the ticker symbol of GPRO in 2014.

Parrot Drones: Parrot is a European leader based in Paris that creates, develops, and markets consumer technology products for smartphones and tablets worldwide. It offers consumer drones, including mini, AR, and bebop drones; commercial drones; handsfree kits, plug and plays, and infotainment products; Bluetooth, digital music, and infotainment solutions; and audio products and connected devices.

Yuneec: Major Chinese competitor and manufacturer of remote-controlled electric aviation designed for model making applications and to conduct aerial photography. The company’s aviation range from manned aircraft, electric drones, and audio controlled helicopters to micro-copters and camera supported quadcopters and hexacopters, enabling people to capture a broader picture and see live video of places from above.

UVify: Developer and manufacturer of autonomous unmanned drones based in San Francisco CA, designed to create amazing experiences with drones. The company’s drones can be used in drone racing, videography, freestyle flying, and research, enabling customers with intelligently designed, high-performance drones to fly farther and faster.

Autel Robotics: American developer of flying camera drones designed for aerial photography systems. The company’s flying camera drones utilize aerial engineering and camera drone technologies and develop quadcopters and flying remote control GoPro camera systems, enabling users with superior aerial imaging, filming, and photography.

Excellent business model and differentiated technology getting marred by trade tensions and emerging regulations

Market Saturation and growing competitive pressure growing headwinds: Unless DJI finds more markets for its products or meaningfully expands its product suite, its growth is likely to stagnate. Also, several other competitors are spending a lot more attention and money on this segment, and we expect higher competition going forward. At the current stage, DJI’s popularity is caused by a temporary situation where the flight systems powered by the above companies are not competitive enough in terms of stability, maximum flight time, and human interaction. However, as DJI’s technology in consumer drones reaches a ceiling, it is only a matter of time for other system providers to catch up with DJI.

Trade Tensions in the Global Markets can impact both supply and demand: The last two years have witnessed various cases of deglobalization, which is considered especially harmful for the development of tech firms. In DJI’s case, the risks aroused by the trend of deglobalization involves every step from production to sales of DJI’s business. On the production side, the company heavily relies on overseas hardware suppliers. The core components such as motion sensors, CMOS sensors, and GPS modules are mostly provided by the US and European companies. If DJI is blacklisted by the United States, it will lose access to motion tracking sensors that are supplied by InvenSense, Phantom series chips provided by Atmel, visual processors from Intel, and the WiFi SoC from Qualcomm. Not to mention the loss of almost 50% market share. This uncertainty is going to act as a glass ceiling to DJI’s IPO valuations and further share appreciation.

Dependency on non-domestic markets: The company has around 80% of total revenue from outside China and around 40% from the US market. Any change in regulations in the USA and EU can lead to significant disruptions to the business. In China as well, the company is now facing changing regulations that restrict the easy sale of more sophisticated drones

In a nutshell, DJI is likely to continue its pole position in the drone market for the near future with better technology, a large product stack, and a competitive manufacturing setup. However, there is a regulatory overhang over the company that stops it from commanding the kind of valuation a profitable company with $ 2 Bn+ revenue should command in current market conditions. We are sanguine about the prospects of DJI in the near term.

Understanding SPACs Better

by tradmin

“The premise of SPACs relies heavily on the reputation of the SPAC founder – their ability to raise funds from a broad group of shareholders”

We inspect in detail how SPACs work, how has been the performance of SPACs in the past, and whether it is a fad that would fade away soon or meant to stay on.

SPACs are a major movement in the IPO world right now. Over the past few years, firms such as Nikola, Draft King, and Virgin Galactic have all joined the market through SPAC (Special Purpose Acquisition Companies). This has been a record year for SPACs with nearly $34.6 Billion in SPAC gross proceeds so far in 2020. That’s 3-4 times higher than the $12.1 Billion in gross proceeds in 2019 and the $9.7 Billion in 2018, as per Dealogic.

These structures, also known as blank check companies give private firms an alternative to an otherwise costly and time-consuming IPO process, making them hugely successful these days. Some investors see strong potential in SPACs and claim them to be a more effective way for firms to go public, but serious critics suggest they encourage backdoor transactions that are not worth the risk and promote opacity.

How do SPACs work?

SPAC mergers are very similar to a reverse merger. They are generally formed by investors with expertise in a particular industry or business sector to pursue deals in that area. While forming a SPAC, the founders sometimes have at least one acquisition target in mind, but they explicitly don’t identify that target to avoid disclosure requirements needed during IPOs. Hence, the name blank check companies. Many have argued that companies like Nikola and DraftKings wouldn’t have made been able to go through the normal IPO process because of the strict due diligence involved in a typical IPO.

Investors who buy stocks in the IPO have no idea what company they are ultimately going to invest in. They are effectively buying the target company’s IPO in advance (say Virgin Galactic) without knowing the essence of what the target company does and the price that will be paid by the acquiring company (say Social Capital Hedosophia Holdings Corp). It is important to note that these deals will be usually structured in such a way that if the investors don’t like the target company they can get their money back by just backing out of the deal before the merger closes.

Unlike normal belief, SPACs don’t seem to be cheaper than traditional IPOs. They pay underwriters and institutional investors a fee of around 5-6% of the sum raised and gives the founder up to 20% of the shares for free. Even after accounting for the additional cash brought in by SPAC’s sponsors and other friends and family, SPACs aren’t any less expensive than IPOs today.

With a conventional IPO, promoters and directors, and officers sign a lock-in for 180 days from the IPO date. For a SPAC IPO, the standard lock-in period ranges up to one year after the close of the closed merger or De-SPAC deal, subject to early termination of the common stock sell at a fixed price (generally $12 or above) for 20 out of 30 trading days beginning 150 days after the closure of the De-SPAC transaction.

The money earned by the SPAC is deposited into an interest-bearing trust account. The funds are only used to make an acquisition or to refund the capital to stakeholders when the SPAC is liquidated. SPACs normally have two years for getting completed or winding-up. Some instances include the SPAC’s working capital being funded by the interest received from the trust. Following the acquisition completion, a SPAC is listed on one of the prominent stock exchanges.

In our opinion, the fees and structure for SPACs would continue to whittle down and can become better than IPOs where bankers have created high-cost structures. Our primary concern is all-around compliance, investor rights’ protection, initial and ongoing disclosures, and scrutiny that make it safer for the general public to invest through an IPO. Unless SPACs can match IPOs in terms of transparency and reporting and third-party scrutiny (analysts industry experts), they will continue to be the domain of a small bunch of fund managers and institutions engaged in dodgy financial engineering. As the overall crypto industry has realized that being regulated has its benefits, SPACs will need to evolve to have the same or better standards than IPOs.

The biggest SPAC deals made thus far

Pershing Square Tontine made waves in the rapidly growing SPAC space with its July debut. The firm raised $4 Billion with its IPO, a record for such investment vehicles and a new sign of Wall Street’s obsession with SPACs. The stock is currently trading at a share price of $23.90.

Churchill Capital Corp III, and MultiPlan Inc. entered into an agreement to merge in a deal worth $11 Billion that will take the U.S. healthcare services firm public. The deal will expand MultiPlan’s data analytics platform and is the largest SPAC merger ever. The merged company will be listed on NYSE and will operate under the name MultiPlan.

MultiPlan will receive up to $3.7 Billion of new equity that will reduce the firm’s debt. The transaction includes $1.3 Billion worth of common stock at $10 a share and $1.3 Billion in convertible debt that will be convertible at $13 per share.

Blackstone-owned Vivint is also one of the biggest corporations to enter into a SPAC arrangement since the IPO. Blackstone had explored an IPO or sale of the technology company and ended up merging with a SPAC raised by SoftBank’s Fortress Investment Group, in a deal valued at $5.6 Billion including debt.

 

The SPAC and PE camaraderie

The SPAC burst is taking place at a time when trillions of dollars are sitting in private equity and venture capital funds. For institutional buyers, SPACs serve as an incentive to buy into glittering businesses that would otherwise stay private. Analysts claim that these cash shell structures remain a lousy gamble for average investors. The majority trades at less than $10-$12 per share, the regular price at which SPACs first sell their stock to the public.

For private equity funds, they have a strong economic interest in the company due to less upfront spending. A private equity fund financing a SPAC typically purchases between 2% and 3% of the shares on the public listing, more often by buying businesses via SPACs to pay down their obligations more efficiently.

For 21% of the founders of SPACs, an institution is either linked to a private equity fund or one of the managers is operating a private equity portfolio simultaneously.

 

Why are SPACs so popular now when they have been around since the 1980s?

In the 1980s, SPACs acquired a shady reputation tied to penny stock frauds. In the past two decades, new laws and regulations helped add credibility to bolster investor confidence. SPACs have an appeal to private companies that wish to go public in this volatile environment because SPACs guarantee the transaction at a certain valuation as opposed to the IPO which are seen as riskier and may or may not go through once documents are publicly filed. For example, WeWork’s IPO got scuttled once it published its details and intense scrutiny of the company led investors to back out.

It can take months for companies to negotiate pricing, file documents, get necessary approvals and then finally list on stock exchanges SPACs have an edge here where companies can work with stakeholders that understand them well and can conclude transactions quickly. Given the long timelines associated with an IPO, the valuation of the underlying company can also take a nosedive.

IPOs require significant private information to be made available to the general public for scrutiny. A large number of companies, especially tech companies are uncomfortable disclosing such details and may instead want to go through the SPAC structure which has lower disclosure requirements.

Businesses going public through SPACs in 2020 have had higher valuation and share price growth than traditional IPOs; in September, United Wholesale Mortgage went public in the latest SPAC transaction with a valuation of over $16 Billion.
With the quality of management teams improving, SPACs are gaining traction and more institutional investors and HNIs are buying in. With SPAC funds getting bigger, the scale of blank check deals is also expected to increase.

A lot needs to be done before SPACs go mainstream

One of the biggest issues is that firms going public via SPACs can afford to bypass critical oversight and intense scrutiny, unlike conventional IPOs. For example – Nikola, who went public via the SPAC a few months ago has turned out to be the focus on multiple allegations lately. Federal authorities have since begun to pose questions and the SEC is also investigating how SPACs report their ownership and how compensation is related to the purchase.

Investors are at greater risk compared to IPOs as they do not know the target investee company at the time of investment.

SPACs may prove to be quite expensive. In certain blank-check transactions, the founders of SPAC have the right to purchase 20% of the resulting public business at rock-bottom valuation. For example, initial shareholders of Social Capital got 20% of the Company at $0.002 per founder per share while the public shareholders got the remaining 80% at $10 per share.

Target firms also give up more power as they sell to a SPAC that has its operating staff in place. They are therefore subject to a vote and control by the owners of the SPAC. This can lead to deal cancelations even after the announcement. 

Analyzing the performance of previous SPACs 

We analyzed 50 SPAC merger deals that happened between 2015-2019 and how they are faring now. Are they profitable, what share price are they at now and how does the valuation look like? Look at the table attached in Annexure I for the detailed analysis.

While Nikola Corporation has been the biggest loser after its SPAC merger closed, its valuation has dropped by more than 50%, and currently stands at $7.14 Billion. The biggest gainers have been in the healthcare segment, financial services, analytics, and consumer goods. For Immunovant and AdaptHealth in the healthcare segment, the valuations have soared by more than 85%. For SaaS firms like Clarivate Plc, the valuation leap has been a colossal $5.7 Billion. Open Lending Corp which focuses on lending now has a share price of $26.12 with a valuation higher by 80% than its SPAC price.

The underlying fact is although some good names get benefitted from the SPAC route, total losses outnumber profitable SPACs. The majority of companies have not been able to perform well. Talking about the 50 deals that we analyzed, 37 of them (74% of total) now have current share price trading at less than $10 per share with a current average market capitalization of less than $250 Million. The number further disappoints as 40% of those firms end up with share prices trading at less than $5 in the stock market.

Upcoming SPACs

On 7th October, Momentus Inc. reported its intent to sign a merger agreement with Stable Road Acquisition Corp Momentus offers a “last mile delivery” service for spacecraft, with a transfer vehicle that helps deliver satellites from a rocket to a specific orbit. The merging business entity will be named Momentus Inc. after termination of the deal and its shares are to be listed under the ticker symbol “MNTS” on Nasdaq.

This merger will create the first publicly traded space infrastructure company. Strategic partners and clients include Lockheed Martin and veterans like SpaceX and NASA. The combined company will have an estimated valuation of approximately $1.2 Billion following transaction close in January 2021.

Post-merger Momentus will have approximately $310 Million in cash on the balance sheet, to be funded by Stable Road’s $172.5 Million of cash held in trust (assuming no redemptions) and $175 Million from a fully committed common stock PIPE at $10 per share, including investments from private equity growth investors, family offices and niche top-tier public institutional investors.

Will SPACs fare in the long run?

Bill Ackman’s SPAC which recently raised $4 Billion for his Pershing Square Tontine Holdings is by far the largest SPAC ever raised. There will be no founder’s stake in the company saving up on huge SPAC fees. If the SPAC succeeds in taking a large private company public – this will be the best proof of concept for the SPAC structure.

The premise of SPACs relies heavily on the reputation of the SPAC founder – their ability to raise funds from a broad group of shareholders. A blank check company is a testament to the faith that the investors have in that person’s ability to find and execute a good deal. We believe that the future of blank check companies remains doubtful. Investors find SPAC deals as a better way to go public, while critics argue that the SPAC boom is just a trend that isn’t destined to last in the long run.

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