Coincheck: Overvalued And Overly Reliant On Japan

Summary Coincheck`s revenue grew 130% YoY, but its gross margins have declined, and it faces increasing customer acquisition costs. The Japanese crypto market lags behind other regions, with only 8% penetration and limited demand for altcoins beyond BTC, ETH, and XRP. Coincheck`s valuation is high at 13 times book value, and I see too many risks in longing CNCK at this time. In early December, Coincheck Group N.V. ( CNCK ) became one of the latest Nasdaq-listed crypto-businesses through a SPAC merger with Thunder Bridge Capital Partners IV, Inc. ( THCP ). Following the completion of the deal, Coincheck is just the second company listed on the Nasdaq after Coinbase ( COIN ) to primarily operate a cryptocurrency exchange business. Though headquartered in the Netherlands, Coincheck operates a Japan-based exchange. In this article, we`ll look at the company`s past financial performance, balance sheet, and the cryptocurrency market in Japan. Coincheck Business Segments Revenue Segment Breakout FY24 (Coincheck) Coincheck Group N.V. primarily operates the Coincheck cryptocurrency exchange. Transaction revenue makes up 92.5% of the company`s total revenue with the remaining 7.5% of revenue derived from products like NFTs, IEOs, wholesale services, subscriptions, and on/off ramp fees. In the transaction revenue segment, Coincheck`s gross margins have generally been in decline for each of the last three years. For FY year ended March 2022, 2023, and 2024, Coincheck`s margin between sales and COGS was 4.05%, 3.45%, and 3.45% respectively. That number is even slightly lower at 3.39% as of six months ended September: Coincheck The good news is Coincheck grew revenue by 130% year over year in the six months ended September and flipped from a net loss in the 2023 period to a $3.2 million gain through the first half of FY 2025. Coincheck While the company has flipped back to net profit to begin its fiscal year, top line revenue is well below the highs from fiscal years 2021 and 2022. Coincheck`s exchange business operates only in Japan, and that market has historically under-performed other jurisdictions from a market penetration standpoint. The Japanese Crypto Market As I see it, Coincheck is a bet on the expansion of the Japanese cryptocurrency market. The company claims the top market position in the Japanese crypto consumer market with 20% share and 2.1 million accounts. This is a market that currently lags other jurisdictions from a crypto-holder penetration standpoint according to Coincheck`s November investor deck. 17% of the United States population is estimated to hold cryptocurrencies in some form while less than 8% of Japan`s population holds crypto. Coincheck This is in spite of a crypto-regulatory environment in Japan that is more established than the United States. Interestingly, US-headquartered crypto exchange businesses Coinbase and Kraken both left the Japan market due to softness in the broad crypto market several years ago. Kraken cited focused use of resources in other jurisdictions as one of the reasons for leaving Japan. There are two ways to look at that; on one hand, it could be a clear sign that market demand for crypto is limited in Japan. On the other hand, it`s an indication that Coincheck has less competition in Japan if that consumer demand should ever return to previous highs. The company offers prospective shareholders solid insight on market expense and user acquisition costs. Coincheck Through the first half of 2024, market expenses have exceeded revenue generated from users who have completed the know-your-customer on-boarding process. Cost per user increased to $46 during the April-June 2024 quarter. Each of these signals - customer acquisition costs exceeding revenue from new users and cost of acquisition approaching/exceeding $50 - were signs of exhaustion in the crypto market during the 2021 bull run. Balance Sheet The overwhelming majority of assets on Coincheck`s balance sheet are customer assets: Assets (Coincheck) As of the end of September 2024, Coincheck had total assets of 690.4 billion yen, 85% of which are safeguarded assets with an additional 7% made up of segregated deposits. The company has 10.6 billion yen in cash and equivalents against 1.4 billion in total non-current liabilities: Liabilities as of Sept 2024 (Coincheck) Coincheck also operates a lending and borrowing service with customers and discloses 35.6 billion yen in crypto assets held against the 35.5 billion yen in crypto borrowings. The safeguard assets are mainly Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ) with the two coins accounting for 83% of safeguard assets: Safeguard assets breakout (Coincheck) XRP ( XRP-USD ) makes up another 10% of total safeguard assets. Meaning just 7% of the customer crypto assets that are held through Coincheck are assets other than BTC, ETH, and XRP. This says to me that in addition to lagging the broad crypto penetration observed in other jurisdictions, the Japan market seems to have very little appetite for cryptocurrencies outside of those that are near the top of the market capitalization list. Risks Observing CNCK through some basic valuation multiples, it`s hard to make the argument that the company is `cheap` at a $1.2 billion valuation. Coincheck`s truest peer in the market is Coinbase. I`ve made no bones about my view that COIN stock is overvalued fundamentally in past SA articles. I still hold that view on COIN and CNCK is arguably even more expensive : Data by YCharts At 13 times book value, CNCK is trading at nearly double the valuation of COIN. At about a $1 billion in first half FY 2025 top line revenue, CNCK is trading at an annualized sales multiple of 6 - this is actually a bit cheaper than COIN but well beyond the 3x financial sector median. It`s important to point out that since Coincheck operates in just one country, there is a considerable amount of jurisdiction risk at play in longing CNCK. First, there is currency risk in the yen. While the BOJ is expected to increase rates by 25 bps on January 24th, a 0.5% interest rate would be the highest short term rate in Japan since 2007. Higher rates from the BOJ could pose a risk to the broader market as well if last summer was any indication . Second, global insurgents could theoretically take share from Coincheck if the Japanese market were to ever sniff the interest in cryptocurrencies that it had back in 2021. Finally, Coincheck`s user base is primarily buying BTC and ETH through the platform. If spot ETFs are approved in Japan, it could potentially diminish the need for Coincheck in the eyes of the company`s user base. Closing Summary I think there are too many risks in longing CNCK. There is valuation risk, single jurisdiction risk, and market risk. Demand for crypto assets in Japan simply has not been as robust as it is in the rest of the world. Furthermore, the market demand for altcoins in Japan doesn`t appear to be existent at all judging by Coincheck`s balance sheet. With 93% of safeguard assets sitting in BTC, ETH, and XRP - Coincheck`s customer does not go very far down the market cap list for digital asset exposure. I see very little switching cost for the consumer if BTC, ETH, and XRP are the only assets that have real market demand. And given the fact that Coincheck`s marketing spend through the first half of 2024 was already outpacing revenue from on-boarded customers, I just don`t have a lot of confidence in CNCK position at this point in time.

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