It may feel like it’s been a few years since OpenSea announced the funding round that pushed its valuation to the $13 billion mark. It was January.
At the time, this column dug into the company’s financial performance and came to a number of conclusions, primarily that the company was generating a lot of revenue. That meant OpenSea appeared somewhat inexpensive at its $13 billion price tag when stacked up against the revenue multiples other unicorns were getting in new, aggressive venture capital rounds.
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But we were also cautious, noting that Coinbase’s revenue multiple was more conservative than OpenSea’s, which gave us pause due to the well-known crypto exchange’s history of growth and profitability.
We summed it up as follows:
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.
That wound up being correct much sooner than we expected. So let’s collect recent OpenSea market data, execute our usual round of valuation math, and then compare where the NFT marketplace’s valuation now sits compared to both its own financial performance and publicly traded comparables.
The last time we looked at OpenSea, we came away a bit more impressed than we expected to. Let’s see if that happens again.
The Q2 NFT market
If you read TechCrunch+ regularly, you may have seen two looks at the NFT market on our pages in recent weeks. In early June, we argued that the market was indeed slumping, and, based on the data available at the time, we were comfortably confident about it.
So how did June go for NFTs? Poorly. According to Dune data, OpenSea’s monthly trading volume on the Ethereum blockchain has fallen from $4.86 billion in January to $3.49 billion in April, $2.60 billion in May and just $696.6 million in June. Per data from DappRadar, the last 30 days’ volume on OpenSea is worth $650.4 million. So we have two sources of similar data for the OpenSea business.
Given the discrepancy and a general desire to avoid accidentally being too cheap in our accounting, let’s round up the Dune number for June to $700 million. Now, we can glean a couple of things from that number:
- At $700 million, OpenSea’s 2.5% cut works out to $17.5 million.
- A $700 million June gives OpenSea an annual run-rate volume of $8.4 billion for the year, with $210 million in resulting net revenue.
How does annual run-rate revenue of $210 million look against a $13 billion valuation? Pretty terrible, frankly.
That revenue run rate makes OpenSea’s most recent price tag worth around 62x its estimated June revenue pace. That’s pricey! It’s also far more expensive than the company was earlier this year, when the NFT market, as we can see in the above data, was far more active than it was in June.
Back in January, we noted that OpenSea was worth about 15.6x its $13 billion valuation. At that time, Coinbase was worth around 10x its own revenues, which made us argue that while OpenSea was not cheap at its new price, given its then-current revenue results, it was also not too expensive.
But we cautioned the following, noting that Coinbase’s huge growth and profitability through Q4 2021 came with a caveat, giving the exchange a far lower revenue multiple than we might expect from a SaaS company of similar size:
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.
A crypto winter has set in since we wrote that, and after holding up for several months, NFT volume has joined in the Sad Times Olympics currently being held in the world of blockchain.
Coinbase’s trailing price/sales multiple — the public-market equivalent of the more aggressive revenue run-rate multiple that startups covet — isn’t 10x today. Or 5x. Or 4x. Or 3x. Or even 2x. Indeed, per Yahoo Finance, it’s 1.72x. While Coinbase’s revenue multiple has compressed, making OpenSea’s January metrics appear increasingly expensive, the NFT marketplace’s own multiple has expanded.
This is what happens when you price an illiquid asset at a market peak and don’t reprice it when that market corrects sharply. The resulting math gets very ugly, very quickly.
There’s much more we aren’t getting into: The general decline in crypto trading fees as a percentage of trading volume, Coinbase’s own NFT push, the fee story there and more. But what matters is that OpenSea’s January price tag made some sense at then-current market prices and activity. With both prices and activity in decline, we cannot repeat our conclusion that there is a reason to grok why OpenSea is valued at $13 billion.
Indeed, if we throw some apples and oranges together and put Coinbase’s trailing revenue multiple against our estimate for OpenSea’s June revenue run rate, we find that OpenSea is not even a unicorn, let alone a decacorn.
Now the web3 faithful will shrug all this off and note that the NFT market goes up and down, and as it is down today, it will go up again. That may be true! And it may even be correct in the near future.
Today, however, it is not true. And that means that the huge venture bet on OpenSea is now dependent on a strong resurgence in NFT volume to make sense. For some, perhaps the resurgence may have to be even higher to make the math appear favorable once again for the best-known NFT marketplace out there.
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