This crypto exchange could be worth $15-$20 billion in an IPO

A 30-year-old billionaire, Bankman-Fried has become a white knight for struggling crypto firms, lending money to companies like BlockFi and Voyager Digital. He also owns 7.6% of trading platform Robinhood Markets (ticker: HOOD).

FTX exploded in popularity last year as Bitcoin surged. An aggressive advertising strategy included acquiring naming rights to the Miami Heat arena. Quarterback Tom Brady and his supermodel wife, Gisele Bündchen, are among FTX’s brand ambassadors.

Some of FTX’s financials were recently made public in reports from The Wall Street Journal and CNBC. FTX achieved net income of $388 million last year on revenue of $1.02 billion, marking sales growth of more than 1,000% from the previous year. Profit margins were 27% and the company had $2.5 billion in cash on hand in January, according to the reports.

FTX had revenue of $270 million in the first quarter of 2022, according to CNBC. Operating margins were close to 50%, excluding advertising and “related parties,” CNBC said.

Bankman-Fried largely confirmed these numbers in a Twitter post mailand said “fwiw numbers here are correct ballpark.”

FTX was valued at $32 billion, according to its latest funding round in January.

The decline in crypto has likely pressured FTX’s valuation, revenue and profits, as it has other exchanges. Actual,

Coinbase Global

(COIN), the only publicly traded crypto exchange, posted a loss of $1.1 billion in the second quarter.

The leaked financials indicate that FTX is far more profitable than most rivals. And while earnings growth likely won’t stay close to 1,000%, even if it falls to a 20% annual rate, FTX stock could command a hefty premium.

By the numbers, FTX is similar in some ways

Interactive brokers
,

which generated net income of $308 million last year on revenue of $2.7 billion. Interactive Brokers has a market value of around $27 billion.

A valuation for FTX will depend on whether the market views it as a high-growth “fintech” and crypto play, or a more traditional brokerage or exchange, according to Dan Dolev, analyst at Mizuho Securities.

“Probably somewhere in the middle,” he says. “The narrative is going to be very, very important if and when they become public.”

FTX could fetch a multiple of 40 times earnings, according to an analyst who asked not to be identified and spoke of a private company. Based on FTX’s 2021 earnings, the equity would be worth $15.5 billion at that multiple.

By comparison, Interactive Brokers fetches 14 times next year’s earnings.

Charles Schwab

(SCHW) is valued at 16 times. Robinhood is not profitable.

Traditional exchanges, to which FTX can also be compared, trade close to 20 times, with the Intercontinental Exchange – which runs the New York Stock Exchange – fetching 19 times next year’s earnings.

Helping FTX’s case is its lean operating structure and large profit margins. With about 300 employees, FTX has about 10% of the staff at Interactive Brokers or Coinbase, which have begun significant layoffs to cut costs.

“What FTX has done very well is to keep costs low and run the same business [as Coinbase] with a much leaner cost structure, Dolev said. “When it comes to valuation it will be a big positive.”

The Mizuho analyst, who said he recently hosted a dinner with Bankman-Fried in New York, added that he believes FTX is looking beyond digital assets, which may just be a way to get customers in the door.

“I think they want to cross and upsell to more financial services,” Dolev said. “It’s not just about crypto trading.”

Estimating FTX’s future profits and margins will be critical to any valuation exercise. If the company managed to grow profits at a 20% annual clip, it could reach $466 million in 2022 and $559 million in 2023. At the $513 million midpoint, a 40x multiple would value FTX at $20.5 billion.

Another way to value the company would be based on the market share of spot trading and derivatives volume, along with the profit, based on earnings before interest, taxes, depreciation and amortization, or Ebitda.

Assuming crypto prices remain subdued and FTX doubles its market share in three to five years, annual spot trading volume will reach $1.5 trillion. At trading commissions averaging 0.25%, the company will reach $3.5 billion in annual revenue. With an operating margin of 35%, the company can bring in $1.2 billion in Ebitda.

At 10 times Ebitda, the company will then be worth 12 billion dollars. The derivatives business could be worth another $5 billion in market capitalization, taking it to $17 billion. That doesn’t take into account other ventures Bankman-Fried is investing in, including stock trading and a potential stake in crypto lender BlockFi. Those additional businesses could be worth an additional $3 billion in market value, according to an analyst who requested anonymity and discussed a privately held company.

Admittedly, bottom line earnings in crypto isn’t exactly an exact science. Coinbase is losing money in part because it is spending a lot of money to expand. If FTX were to increase marketing and capital expenditures, margins and profit growth would almost certainly weaken. A prolonged slowdown in crypto trading and prices will also pressure FTX’s revenue and profit growth.

At $15 billion, FTX would be worth more than Robinhood, now valued at $8 billion in equity. At the upper $20 billion valuation, FTX would be worth more than Coinbase, which has a market cap of $16 billion.

FTX did not immediately respond to a request for comment Barron’s on any plans to be made public.

Write to Jack Denton at [email protected]