Stripe and Coinbase Valuation: Is $115B or $77B Rational?

Recent Valuations of Coinbase and Stripe

Yesterday, CoinDesk reported that cryptocurrency trading platform Coinbase is currently assessed at a $77 billion valuation within private trading venues.

Simultaneously, Forbes indicated that Stripe, a prominent payment processing company, is being valued at $115 billion on secondary markets.

These secondary markets facilitate the buying and selling of private shares, though access is restricted.

Initial Concerns About Secondary Market Valuations

An initial reaction was to caution against these elevated secondary market valuations.

However, further investigation revealed that current public market conditions provide historical context.

Specifically, seemingly ambitious secondary market transactions have, in the past, proven to be conservative when compared to valuations established during subsequent Initial Public Offerings (IPOs).

Moreover, there’s precedent for private market transactions being priced lower than venture capital-determined valuations, yet still yielding positive outcomes.

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The Impact of a Strong Equities Market

The current robust equities market is effectively turning many startup investors into successful stock selectors.

This applies to both those participating in priced funding rounds and those acquiring shares through contemporary secondary markets.

It is challenging to overvalue a startup when the public market demonstrates a willingness to potentially double its valuation immediately upon commencement of trading.

Analyzing Coinbase and Stripe’s New Prices

To better understand the new valuations of Coinbase and Stripe, let's examine their previous private valuations, the recently reported secondary prices, and the current trading performance of other companies that previously engaged in notable secondary market activity.

This comparative analysis will provide valuable insight.

The following exploration promises to be insightful!

Valuation Dynamics: Examining Coinbase and Beyond

According to Crunchbase data from October 2018, Coinbase’s valuation in private markets reached approximately $8 billion. Recent secondary transactions, however, suggest valuations ranging from $50 billion to $75 billion, with some former employees even estimating a potential worth of $100 billion.

While the current $77 billion price tag may appear moderate in comparison, it’s important to remember that these earlier valuations were largely determined by buyers lacking insider knowledge; those acquiring shares on secondary markets were likely not members of Coinbase’s board.

Therefore, the public market is, in effect, re-evaluating Coinbase. The central question is whether these new prices are justified. A definitive answer requires further analysis.

Stripe, valued at $115 billion on secondary exchanges, presents a similar scenario, potentially representing either an irrational exuberance or a logical progression. Its last funding round, a $600 million Series G in mid-2020, valued the company at around $36 billion.

Rumors indicate Stripe is seeking new capital at a $100 billion valuation. If this occurs, secondary transactions would represent only a 15% premium over the valuation assigned by significant private investors. However, smaller investors would still be paying 3.2 times more per share than larger investors paid last year, highlighting the advantages of venture capital investment.

Should the $100 billion funding round not materialize at the anticipated valuation, the secondary market’s implied valuation of Stripe could prove to be significantly inflated. This possibility warrants consideration. Let's reserve judgment for now.

To understand the trends in secondary market transactions, consider Airbnb. In August 2020, ValueTheMarkets observed that private market investors had valued the company at under $20 billion, while secondary markets were paying more than double that amount.

Was this an overestimation by the private market? It appears not. Today, Airbnb is valued at $116 billion, even after a 4% decline in morning trading. The secondary transactions, while exceeding private investor valuations, were ultimately lower than what the public market was willing to pay.

This pattern seems to apply primarily to companies experiencing substantial growth. Given our discussion of Stripe and Coinbase, this example is particularly relevant.

Palantir offers a contrasting case, where private money became more pessimistic than its initial investors. However, both assessments proved inaccurate. Despite a recent 7% drop, Palantir’s value now exceeds $40 billion, far surpassing the $10 billion or $20 billion valuations initially suggested.

Further research into past Uber secondary market data can yield additional examples illustrating this concept. Interestingly, it proved challenging to find instances of hot tech companies being priced above their eventual public market valuations in recent secondary deals.

While examples of unsuccessful IPOs, such as Casper’s or Lemonade’s, exist, the mattress company’s case appears to stem from overly optimistic private investors, and the insurance company’s stock surged following its initial public offering due to poor IPO pricing.

Returning to our initial point, the current bullish stock market makes it difficult to significantly overpay for equity in thriving companies. Unless valuations become truly exorbitant, defining “overpayment” in 2021 is problematic.

Would I personally invest $77 billion in Coinbase? Probably not. However, the public markets may disagree. Therefore, before dismissing these valuations, it’s prudent to observe how a more liquid market responds.