What about the upcoming (Coinbase) IPO? Lessons from the pop!

It's been a great 12 months for the stock market in general and new IPOs in particular (a special mention should be made to SPACs and their explosion over the past year as well). This week we will witness the latest superstar to hit the public markets, Coinbase (code COIN). It's no secret that I have been an admirer of the company, the platform and the management team and I am certain that the stock will do very well. It should be noted that the company has chosen to forego the IPO route and decide on a direct listing instead. This is a technicality that is more appropriate for another blog post (and one which I described to my finance students a couple of weeks back) but in summary it means that it will let the market decide upon it's initial valuation rather than rely on a cabal of investment banks to price it. All indicators point to it surpassing a $100 billion valuation shortly after listing. This would be quite a success and if so Coinbase would instantly be worth more than the NYSE and Nasdaq COMBINED! 

Side note: If push came to shove I would be a buyer of COIN on day one, but would prefer to let the stock settle down and start dipping my toes in the upcoming weeks, loading up if/when Bitcoin corrects (which it may or may not do by the way) as for better or worst, the Coinbase's fortunes are tied to those of the underlying crypto/blockchain assets that trade on its platform.

Here are a couple of thoughts on Coinbase and the new listings overall:

1. New listings are much more than a capital raising exercise. They can actually be an amazing marketing tool which helps raise a brand's awareness amongst potential consumers and future investors. Much is often written about how much money is left on the table when a new IPO pops 50% or more on day 1, as was the case with so many hot tech companies in the past year. Whilst it is technically true that the companies did leave some money on the table by pricing the stock too low, the real question is how much money? And is the positive publicity worth it? In more cases the answer is: not very much (as the public float is often small and the founders and key shareholders still own the vast majority of the company post IPO) and YES IT IS worth it. It is brand awareness that traditional advertising generally cannot buy.
2. IPOs and public listings provide companies with a currency with which they can hopefully buy themselves time and/or profitability through acquisitions. Think Amazon, think Tesla and think many other highly successful companies which had years of losses, only to eventually turn their fortunes around. True, most had the genius and hard work of their founders and management team to thank for that, but we cannot dismiss the importance of their elevated stock prices which allowed them to borrow, acquire and hire their way to positive net income over time.
3. Valuations are all relative. For years I traded at investment banks and hedge funds, with a key focus on relative value/pairs trading. We would look to buy cheap, sell (or short) expensive, especially if we could identify a catalyst or two to narrow that gap. Valuation is much more of an art than a science and it is important that one not get hung up on absolute numbers. An old mantra in the investment world is that "markets can remain irrational, much longer than you can remain solvent" that should be heeded at all times (as a recent example, our hedge fund friends who were short Gamestop can surely attest to that). Relative valuations on the other hand are key. While valuation discrepancies can also remain out of sync for long periods of time, they eventually do snap back and those should be the paramount in making investment decisions.