Can Coinbase Thaw the Crypto Winter?

Bitcoin “Hall of Famer” Charlie Shrem just issued a new crypto recommendation… A $20 play that could be even bigger than Coinbase.

Read more here.

During 2020 and 2021, there was no hotter asset class to be in than cryptocurrencies. Newly minted millionaires emerged out of nowhere thanks to generational moves in dog coins and others. 

Touted as next-generation technology, several coins saw quadruple digit returns in less than a year, like Solana, which gained a whopping 9.800% at its peak in 2021. 

The quickest and easiest way for retail investors to jump in on the craze was through an app developed by Coinbase(COIN). It provided an easy to navigate platform with straightforward instructions.

Shares hit a high of $429 in April of 2021. But like the rest of the cryptocurrency market, they’ve sold off significantly since then. 

However, there’s been a lot of scuttlebut around the crypto space lately.

Bitcoin managed to find a temporary bottom, creating a cascade of buying in other cryptos and Coinbase.

Along with the recent earnings announcement, searches for the retail crypto broker trounce any other retail broker by a factor of more than 15x.

COIN shares are now down by more than 70%, but does that make them a buy at these levels? Or has the crypto bubble popped for good?

Check out our analysis below…  

Coinbase’s Business

Coinbase (COIN) is a cryptocurrency broker offering investors a platform in which they can buy and sell cryptocurrencies. The company collects a fee for every transaction. Naturally, more volume means more money.

It also offers technologies and services that enable partners to build crypto-based applications and securely accept crypto assets as payment. 

The firm has over 103 million verified users, with $96 billion in assets on its platform, a big drop from the same quarter last year, $180 billion. 

Last quarter, $217 billion in volume was traded on its platform, a significant drop from the last-year same quarter, which was $462 billion.  

This comes as the price of Bitcoin has more than halved while other tokens have fallen by even more.

Financials

COIN had an incredible run between 2019 and 2021. 

The firm went from $533 million to $7.8 billion. However, 2022 has been a rough year for the company. It did $2 billion in revenue in Q2 2021; during Q2 2022, it did $803 million in revenue, a decline of 60%. 

Cryptocurrencies have declined significantly from their 2021 highs, and the firm says that’s one of the main reasons why its business has suffered lately. 

Its trading volume has declined substantially, dropping from $462 billion in Q2 2021 to $217 billion in Q2 2022. 

COIN has total debt of $3.6 billion and cash of $5.6 billion based on its most recent quarterly report. The firm’s market cap stands at $20.3 billion. 

The company’s operating cash flow is dreadful at -$528 million (ttm). However, in 2021, cash from operations came in at more than $10 billion. So, even one year at the current cash burn isn’t going to hurt them.

Valuation

COIN spends more money than it makes. The firm’s net income went from $1.6 billion in Q2 2021 to -$1 billion in Q2 2022. And its adjusted EBITDA went from $1.15 billion in Q2 2021 to -$151 million in Q2 2022.

On the bright side, Its price-to-sales is not bad at 2.86x. However, its diluted EPS (ttm) is no good at 9.78x

Profitability

The company has a profit margin of -4.79%. And an operating margin of 24.4%. However, its return on equity is negative, at -5.3%, while its return on assets is 1.45%. Its EBITDA (ttm) is negative, at -$480 million. 

COIN has a negative operating income (ttm), at -$342 million. Furthermore its free cash flow stands at -$615 million (ttm). The company has fired 18% of its workers in an attempt to cut costs and improve its chances of reaching profitability.

Growth

After a blistering pace, the firm’s growth is slowing down and even retracing. However, some areas of its business are growing. For example, its subscription and subscription revenue business grew 44% YoY.  

Over the last two years COIN has made significant strides. The firm has nearly tripled its users from Q2 2020 to Q2 2022, moving from 36 million to 103 million. And it more than doubled its institutional customer base from Q2 2020 to Q2 2022. But on Wall Street, it’s what have you done for me lately, and lately, COIN, has struggled to keep up with its incredible growth. 

Our Opinion 9/10

The crypto market cap declined by $1.3 trillion in Q2, a drop of 60%. To make matters worse, there have been several blowups that have rocked investors’ confidence. Terra/Luna, Celsius, and venture capital firm 3AC have been wiped out. 

Unfortunately, COIN‘s share price is highly correlated to the performance of cryptocurrencies. Which is something no one can predict. And the main reason why many believe COIN is not a good investment right now despite shares dropping by more than 70%.  

That said, we take a contrarian view. 

COIN is the dominant player in the industry. Although cryptocurrencies have suffered greatly in the past year, they appear to have found a temporary bottom.

While we don’t expect COIN to recapture its highs, the company is aggressively working to cut costs and right size the company to the new reality.

As a speculative play, we like the company since it’s unlikely to go under anytime soon and still has a loyal, growing customer base.