Cryptocurrencies have had a bumpy road over the past several years as it seemingly followed a typical boom-bust cycle. Investors were thought to be better off owning the marketplace makers instead of the actual cryptocurrencies themselves. That did not prove to be the case, especially with large crypto exchanges like Coinbase Global Inc. (COIN, Financial). The company’s stock suffered along with the currencies.
Coinbase provides financial infrastructure and technology for the crypto-economy on a global basis. Offerings include operating primary financial accounts for retailers, a marketplace with a pool of liquidity for transacting in crypto assets for institutions and individuals and technology services that enable crypto ecosystem partners to build crypto-based applications and securely accept crypto assets as payment. The company’s mission is to be a safe and legal entry point for retail investors and institutions that want to be involved in cryptocurrency trading. The company claims to have 110 million verified users, over 9,000 institutional customers and 245,000 ecosystem partners in over 100 countries.
Founded in 2012, Coinbase was a great growth story until the market downturn and cryptocurrency crash in 2022. The company’s financial performance is obviously tied to the interest in cryptocurrencies and the trading in these vehicles.
Business updates
The company provided some important metrics in its latest earnings report. Trading volume grew to $830 billion in 2022, an increase from $193 billion in 2020. Subscription and service offering revenue grew over 17 times to nearly $800 million, which compares to $50 million two years ago. The company said that roughly 25% of the top 100 largest hedge funds in the world have chosen to onboard with Coinbase, which is a large increase from only a few at the end of 2020.
In January 2023, the company announced a headcount reduction and across-the-board cost-cutting measures. This is expected to result in a 30% operating expense reduction in the first quarter of 2023.
On the regulatory front, the company was somewhat optimistic about how crypto policy is developing around the world. The European Union’s MiCA framework was finalized in October 2022 and since then, the EU and its member states have directed their attention toward operationalizing and implementing this framework. This fit for-purpose framework for crypto will be applied throughout 27 different member nations in order to create predictability and stability for the industry in those nations.
Financial review
On Feb. 21, the company reported horrendous 2022 operating results. Assets under management declined 71% to $80 billion and total revenue decreased 57.2% to $3.1 billion. Consumer transaction revenue decreased a stunning 65.5% to only $2.2 billion. Higher interest rates allowed it to offset some of the decline in revenue as the company was able to place customer deposits into higher-yielding treasury securities. Interest income increased from $10.5 million in the first quarter to $182.2 million in the fourth quarter.
Operating expenses for the year ballooned to $5.9 billion, which created an operating loss of $2.7 billion. Stock-based compensation totaled $1.6 billion, which represented almost 50% of revenue. Stock-based compensation in the fourth came out to 71% of revenue in the quarter.
Cash balances dropped 38% to $4.2 billion, primarily due to the large operating losses. The company has long-term debt of $3.4 billion, leaving a small net cash position of only $800 million.
The Coinbase platform supports investing in over 80 crypto assets, but its revenue is still very sensitive to the prices of bitcoin and Ethereum, which represent around 41% and 26% of assets on the platform.
Valuation
Coinbase is in the category of money-losing tech companies, with no net profits and likely negative cash flow this year. Valuation tools are limited and price-sales and relative comparisons to competitors are the primary metrics that can be used. Coinbase sells at approximately 5 times revenue, which is roughly in line with the industry. Relative valuations can be risky in a market downturn as all stocks can go down, along with the relative valuation.
The average price target for Coinbase's stock by 12 analysts that cover the company is $68.20, which would provide about 17% upside. The highest price target is $100 and the lowest is $30.
The company pays no dividend and does not buy back shares at this time.
Guru trades
Gurus who have purchased Coinbase stock recently include Catherine Wood (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies. Investors who reduced or sold out of their positions include Chase Coleman (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Summary
The outlook for Coinbase and cryptocurrencies is mixed, with both positive and negative attributes. Tailwinds would include higher overall cryptocurrency prices, transparency on the regulatory environment and market share gains against struggling competitors.
Headwinds include declining crypto prices and lower trading volatility, cyber theft, competitive pressures on pricing and potentially negative global crypto regulation.
I predict the prominent cryptocurrencies will be extremely volatile for the foreseeable future, and it may turn out cryptocurrencies have no intrinsic value at all. That would put Coinbase in the failed technology company basket along with the likes of Pets.com and Webvan. As such, investors may want to wait for a significantly lower price level in order to create a margin of safety.
