Coinbase ($COIN) #1 - How it got my attention

The process of how $COIN became a worthy deep dive candidate.

February 5th, 2022

I am a shameless cloner. Thank you Mohnish.

I was listening to a Podcast with Guy Spier (I am pretty sure it was TIP414). Towards the end guy was asked if he could instantly widen his Circle of Competence in one area what would it be. Guy then named various VC’s, including Andreesssen & Horrowitz. This raised my curiosity and I spent a couple of days studying them. In the end I went through each company on their homepage, checked which ones had an IPO and added them to my screening process. I noticed that a16z exited most of them during the IPO, except for a few. One of them was $COIN.

Now that I had my 13F backup (required to make a bet greater than 1% of assets) I ran the company through my pre screens in order to say no as quickly as possible (Pabrai).

Ownership:
All Executives & Directors: 46.8% & CEO: 31% (Founder)
13F: 34.9%

Revenue:
2019 - $482,949
2020 - $1,141,167
2021 - $7,121,308 (annualized Q3 $5,340,981)

Balance Sheet:
Liquid Assets: $6,589,906 (other cash assets available; need to study)
Total Debt: $13,093,774 (most is current debt; $3,382,185 is LTD)
Interest: Senior Notes
2026 = $6.8 million
2028 = $1.4 million
2031 = $1.4 million
Total = $9.6 million
Operating Cash: $7,736,711 (need to study)

Feasability:
Market Cap: $44.07 billion
FCF required: $4.4 billion (10%)

My first screens are all passed. I see high ownership by the management with a Founder CEO. This increases the probability of a good incentive structure. Revenue is impressive, which increases the probability of customers loving the product, which in the end is the most important thing. The investment looks feasible, because they are generating cash in the general region of the required 10% FCF to make their current valuation reasonable.

Conclusion
This is a worthy investment candidate. It meets all of our criteria. It does still feel a little expensive at the moment. That could be because it truly is, or because we do not realize it's future potential quite yet. The company is very young and Mr. Market may not have had enough time to work and we do not have a 10K yet. We do think that the probability of the blockchain industry growing is high.

We will wait for the 2021.Q4 - 10K to come out and revisit the company.