OpenSea Valuation: Analyzing the $13B Figure

OpenSea Secures $300 Million Funding at $13.3 Billion Valuation

OpenSea, a leading NFT marketplace, has successfully completed a $300 million funding round, resulting in a company valuation of $13.3 billion. The initial report regarding this transaction was released yesterday by a news source, and subsequently verified by the company itself.

For those critical of the current state of the cryptocurrency and NFT market, this funding round may be viewed as further indication of excessive market exuberance. It's notable that OpenSea’s previous funding round, held less than a year ago, occurred at a significantly lower valuation.

Analyzing the Valuation Increase

In July, the company secured $100 million at a $1.5 billion valuation. This substantial increase in valuation naturally prompts questions about potential speculative investment within the financial sector.

Let's investigate the factors contributing to this dramatic shift.

OpenSea’s business model is relatively simple to grasp. As previously discussed, the platform collects a 2.5% commission on each transaction facilitated through its service.

Revenue Estimation and Market Position

This commission structure allows for the tracking of overall trading volume, enabling reasonably accurate estimations of the company’s financial scale. Precise figures are unavailable, however.

Nevertheless, sufficient data exists to provide a clearer understanding of the rationale behind the significant investment and the resulting high valuation.

The primary goal is to assess how the new OpenSea valuation aligns with its revenue generation. Following this, we will evaluate whether the company’s current market price appears justified or inflated.

This analysis will involve data gathering and basic calculations. A thorough examination of the available information is warranted.

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OpenSea’s NFT Marketplace Performance

Determining OpenSea’s financial magnitude can be achieved by examining its trailing 30-day trading volume and applying its 2.5% fee. According to Dappradar, OpenSea processed $2.91 billion in trades during the last 30 days. This suggests a potential gross revenue of $72.75 million for OpenSea.

Considering a single month, extrapolating this figure to a yearly basis indicates OpenSea could achieve $34.92 billion in volume, resulting in gross revenues of $873 million annually.

Alternative data sources, like Dune Analytics (@rchen8), provide more detailed historical insights. Dune reports $3.25 billion in trading volume for December, $2.37 billion for November, and $2.64 billion for October. These combined figures total $8.26 billion in volume, equating to $206.5 million with a 2.5% commission.

Projecting this final number to a full-year estimate yields $826 million. This closely aligns with our initial yearly run-rate estimate of $873 million for OpenSea’s gross revenues, assuming consistent percentage costs.

A reasonable yearly run rate for the company is $850 million, positioned between our two previous estimates. With a $13.3 billion valuation, OpenSea is valued at 15.6 times its current run rate, a figure that isn’t excessively high in the current market.

To illustrate this point, some startups have recently secured funding at $1 billion valuations with only $1 million in annual recurring revenue (ARR). OpenSea’s latest funding round appears comparatively advantageous.

The central question, given OpenSea’s revenues derived from public data, is why the company isn’t valued higher.

Rapidly growing companies with software-based income typically command valuations exceeding $15 per dollar of revenue. However, several factors contribute to OpenSea’s current valuation, which can be viewed as pulling in opposing directions:

• The company’s revenue multiple is relatively low when compared to other software companies exhibiting similar growth patterns, suggesting a conservative valuation.
• Conversely, the revenue multiple is high when contrasted with Coinbase, which has a trailing price/sales ratio of approximately 10x (Yahoo Finance data; Zacks reports 10.6x). This implies OpenSea’s valuation is expensive.
• Our calculations are based on gross revenues, before accounting for the company’s revenue costs. This could lead to an overestimation of revenue quality or the inclusion of items that might be considered contra-revenue. This makes OpenSea’s valuation appear expensive.

These considerations will likely shape individual perspectives, leading to either a bullish or bearish outlook on OpenSea. Let’s introduce another element to the discussion with a key question:

• Why does Coinbase trade at a lower valuation?

Coinbase has demonstrated substantial growth, is highly profitable, and is publicly traded, offering long-term investment opportunities. Yet, the company is valued similarly to lower-tier enterprise SaaS companies still reliant on cash to fund expansion.

The primary reason is market volatility. Cryptocurrencies, like stocks, are traded assets, but they exhibit more pronounced fluctuations than traditional equities. NFTs share this characteristic, with even more dramatic volume spikes and declines. NFTs can be considered a highly sensitive derivative of stock market movements.

Coinbase’s historical volatility in crypto trading has resulted in past revenue declines, leading investors to assign it a lower multiple than other software companies. NFTs are even more volatile, which should translate to an even greater valuation penalty.

This is a crucial point. One could argue that OpenSea’s valuation is expensive considering its relatively short history of generating revenue at scale. Alternatively, its substantial 2021 revenues highlight the significant market opportunity it addresses, making its current price appear reasonable. However, OpenSea’s growth won’t be linear; it will likely experience similar swings to Coinbase, but potentially to a greater extent based on NFT market dynamics.

A Realistic Assessment of OpenSea’s Valuation

Recent analysis suggests that OpenSea’s current valuation may be undervalued when assessed against its core performance metrics, yet simultaneously appears somewhat high considering the volatile nature of the NFT market.

The NFT space experienced multiple peaks and troughs of interest throughout the previous year, demonstrating its inherent instability. Establishing consistent operational norms within this rapidly evolving environment remains a significant challenge.

Increased Competition from Coinbase

Furthermore, with Coinbase now actively entering the NFT arena, the likelihood of a straightforward acquisition of OpenSea by the cryptocurrency exchange has diminished. This development signals an impending period of intensified competition between the two platforms.

Consequently, the coming year is anticipated to be highly competitive, requiring strategic maneuvering from both OpenSea and Coinbase to secure market share.

The newly established price point for OpenSea doesn't represent either an excessive premium or a bargain. It appears to strike a balance between historical performance data and future growth expectations.

Given the demonstrated willingness of individuals to invest substantial amounts in acquiring digital ownership records, this valuation seems justifiable. The future success of OpenSea will depend on navigating these dynamic market conditions.

• NFT Market Volatility: The NFT market is prone to significant fluctuations in interest and value.
• Competitive Landscape: Coinbase’s entry introduces a major competitor to OpenSea.
• Valuation Balance: The current valuation reflects a compromise between past performance and future potential.

Ultimately, the continued demand for NFTs and the ability of platforms like OpenSea to adapt to the evolving landscape will be crucial determinants of long-term success.