Analyzing Coinbase Global (COIN) with the Graham Number

Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * 5 year average earnings per share * book value per share), which for Coinbase Global gives us a fair price of $14.34. In comparison, the stock’s market price is $225.86 per share. Coinbase Global’s current market price is 1475.0% above its Graham number, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.

The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of Coinbase Global:

Sales Revenue Should Be No Less Than $500 million

For Coinbase Global, average sales revenue over the last 4 years has been $3.99 Billion, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.

Current Assets Should Be at Least Twice Current Liabilities

We calculate Coinbase Global's current ratio by dividing its total current assets of $203.59 Billion by its total current liabilities of $197.71 Billion. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Coinbase Global’s current liabilities are actually greater than its current assets, since its current ratio is only 1.0.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since Coinbase Global’s debt ratio is 1.0, the company has an average amount of debt, with a debt to net current asset ratio of 1.0. We calculate Coinbase Global’s debt to net current assets ratio by dividing its total long term of debt of $2.98 Billion by its current assets minus total liabilities of $200.7 Billion.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years

Coinbase Global had good record of retained earnings with an average of $2.16 Billion. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years

We have no record of Coinbase Global offering a regular dividend within the last twenty years.

A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years

We only have 5 years of EPS on Coinbase Global, so it fails the Graham test on this basis alone, but we still think it's worthwhile to look at its growth over the available period. In 2019, the earnings per share was $-0.50, while in 2023, it was $0.37. This give us a 174.0% growth rate during this period, which will satisfy Ben Graham's requirement if it continues on this trend.

Based on the above analysis, we can conclude that Coinbase Global satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it is trading above its fair value and has:

  • impressive sales revenue
  • just enough current assets to cover current liabilities, as shown by its current ratio of 1.03
  • an average amount of debt, with a debt to net current asset ratio of 1.0
  • good record of retained earnings
  • no dividend record from EDGAR
  • a strong EPS growth trend
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.