OpenSea, the well-known NFT marketplace, has raised a $300 million round at a $13.3 billion valuation. Newcomer broke the news yesterday before the company confirmed the transaction.
For critics of the present-day cryptoeconomy and NFT market, the round was perhaps more evidence of how overheated things have become. After all, OpenSea last raised at a fraction of its new valuation under a year ago, adding $100 million to its accounts at a $1.5 billion valuation in July.
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That sort of valuation appreciation must indicate prohibitive speculation among the investing classes, right? Well, let’s find out.
OpenSea is a pretty straightforward business to understand. As I wrote over my winter vacation, the company takes a 2.5% cut of transactions on its service. That means we can track its aggregate trading volume and come up with ballpark estimates for its scale.
Can we get precise? Nope. Can we learn enough to better understand why OpenSea managed to command such a huge check and towering valuation? Yes, I think so.
I want to figure out how the new OpenSea valuation squares up with its revenues. From there, we’ll ask if the company feels underpriced or overpriced. This will be a fun journey of collecting data and executing minor math magic. Let’s do some thinking!
OpenSea’s NFT business
The simplest way to get a handle on the scale of OpenSea is to simply check its trailing 30-day trading volume and apply its 2.5% take rate to the sum. Per crypto data source Dappradar, OpenSea saw $2.91 billion in trading volume in the last 30 days. That works out to an anticipated gross haul from OpenSea of $72.75 million.
That’s a month, mind. If we took that single period and multiplied it to generate a yearly run-rate figure, OpenSea would be on pace to see $34.92 billion in volume, generating gross revenues of $873 million over 12 months.
There are other ways to get our hands on the company’s scale. Data from Dune Analytics collected by @rchen8 has more granular historical data to parse. Per Dune, OpenSea saw trading volume of $3.25 billion in December, $2.37 billion in November and $2.64 billion in October. Combined, those figures work out to $8.26 billion in volume, a 2.5% cut of which would be worth $206.5 million.
If we extrapolate that final number to a full-year tally, it would shake out to a yearly run rate of $826 million. That’s pretty close to our first number of a yearly run-rate estimate of $873 million for OpenSea’s gross revenues, provided that the company’s flat-percentage costs execute in-market as we anticipate.
Let’s use a yearly run rate of $850 million for the company because it’s in between our two estimates for the company’s recent revenue pace, extrapolated to a full-year tally. At a $13.3 billion valuation, OpenSea is only worth 15.6x its present-day run rate. That’s very not insane for today’s market.
How so? Recall that yesterday we were only somewhat astounded to hear that some startups are raising at $1 billion price tags with only $1 million in annual recurring revenue, or ARR. OpenSea’s latest round is a straight-up bargain in comparison.
The real question — given OpenSea’s implied revenues that we can glean from publicly available market data — is why the company is not worth more.
Companies posting rapid growth and software incomes should be worth more than $15 per dollar of revenue in today’s market, right? Yep. But there are a few reasons why OpenSea’s valuation makes sense. Let me try to break those down in terms of which direction they pull:
- The company’s new estimated revenue multiple is low compared to other software companies with similar historical growth curves. This makes OpenSea’s valuation appear conservative.
- The company’s new estimated revenue multiple is high compared to Coinbase, which currently has a trailing price/sales ratio of a little less than 10x, per Yahoo Finance data (Zacks has Coinbase’s price/sales ratio at 10.6x, so it’s around 10x). This makes OpenSea’s valuation appear expensive.
- We’re considering gross revenues for the company before taking into account the company’s revenue costs. This means that we could be overestimating its revenue quality (gross margins), or perhaps counting what could be viewed as contra-revenue items as costs of revenue. This is a little bit technical, but it’s worth remembering that not all software revenue is equal in quality. This makes OpenSea’s valuation appear expensive.
Depending on your own priors, the above will net out to a bullish or bearish take on OpenSea in your mind. Let’s throw one more concept into the mix. To get to that point, a question:
- Why is Coinbase so cheap?
Coinbase has posted monster growth in the last year, is incredibly profitable and has gone public, meaning that owning its shares is not a long-term commitment. And yet the company is trading like a lower-tier enterprise SaaS company that still consumes cash to finance its growth.
The reason is volatility: Cryptocurrencies are like stocks. They trade. But they are a bit like insane stocks in that they tend to have more exaggerated movements than traditional equities. NFTs are like cryptocurrencies, but insane in that their volume tends to spike and deflate with even more violence. NFTs are kinda the second derivative of the second derivative of stocks, if my college calculus recollections hold up.
For Coinbase, historical volatility in crypto trading means that it has seen revenue declines in the past, so investors award it a smaller multiple than other software companies. NFTs are even more bonkers — in a good way, I would say; it makes them very fun to watch — so the same penalty should apply to their valuation, only more so.
This is the key point, I reckon. You could argue that OpenSea’s new valuation is expensive given its somewhat limited history of generating revenue at scale. Or you could argue that its enormous 2021 revenues underscore how big of a market it is tackling, making its new price feel cheap. But what is true is that OpenSea does not have a straight-line path to growth ahead of it; it will see similar swings as Coinbase has, but to an even greater degree by our read of NFT market activity.
So what?
It appears that the new OpenSea valuation is cheap compared to recent fundamentals, but a little expensive when we consider how much its market booms and busts. NFTs had several cycles of interest last year alone. NFTs are a hectic space, and the rules of engagement have very much not been sorted out. Even more, Coinbase is getting into the NFT game and OpenSea is now likely too expensive for the crypto trading shop to buy. So, it’s going to be a gloves-on year for the two.
The new price for OpenSea is neither insane nor cheap. It’s perhaps a reasonable midpoint between fundamentals (a trailing metric) and optimism (a leading metric). I can’t get too mad about it, given that folks really do want to spend huge sums buying the digital signature to a URL. Godspeed!
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