Bitcoin’s Bounce Helps Coinbase Recover

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Last month, the Securities and Exchange Commission (SEC) launched a lawsuit against Coinbase (COIN), alleging the company unlawfully facilitated the buying and selling of crypto asset securities.

Naturally, every financial pro and their brother has been watching this stock like a hawk, with search volume at its highest levels since 2021.

Shares shrugged off the bad news, now trading up almost 70% from the post-news lows.

Yet, the stock is still down more than 80% from its 2021 highs.

And with Bitcoin’s +80% performance year-to-date, it makes you wonder whether there’s still some meat left on the bone.

Coinbase’s Business

Coinbase runs the most well-known cryptocurrency exchange platform in the U.S. and internationally.

They act like an online stock broker but for cryptocurrencies. The company provides financial infrastructure and technology for the cryptocurrency economy, enabling users to buy, sell, store, and use various digital assets.

The company’s revenues are broken down into transactions, subscriptions, and others.

Source: Coinbase Quarterly Filings

The SEC alleges that Coinbase failed to register as a broker like other stock platforms.

There is some irony since Coinbase, along with others in the industry, had been practically begging the SEC for guidance to avoid this very issue.

It’s very unlikely the SEC’s charges would stick when appealed through the court system. However, that takes both time and money.

Financials

Source: Stock Analysis

Coinbase lives and dies by the transaction volume.

But what most folks don’t realize is their profitability cratered in 2022 largely driven by R&D.

In fact, technology expenses as a percentage of revenues jumped from 16.5% in 2021 to 72.8% in 2022.

Broken down, the $1 billion increase was largely driven by $680.3 billion from personnel-related expenses. $518.9 million of that jump came from stock-based compensation expenses tied to an 87% increase in average headcount.

Not a great idea to increase headcount while revenues crater.

Right now, the company holds $5.0 billion in cash on its balance sheet against $3.4 billion in debt while it burns roughly $1 billion in cash each year.

That’s way down from the +$4.0 billion in cash generated in 2021.

Valuation

Source: Seeking Alpha

Coinbase doesn’t generate positive cash or earnings. But then again, none of the other blockchain-related stocks do, except for Block (SQ), which has arguably a much more diverse business model

Interestingly, it runs the lowest price-to-sales ratio compared to the rest of the group, save SQ.

And amongst its peers, only Riot (RIOT) generates cash from operations.

Growth

Source: Seeking Alpha

Again, except for SQ, none of the blockchain-related stocks saw revenue growth last year, after the torrent the preceding years.

However, Marathon Digital (MARA) is forecasted to see revenues grow in 2023 by 55%, beating out RIOT at 34.1% and SQ at 9.9%.

But as far as earnings or cash, only Hut 8 Mining (HUT) has shown free-cash-flow growth in the past few years.

Profitability

Source: Seeking Alpha

A gross profit margin of 100% is likely a miscalculation.

What we want to focus on is the EBITDA margin, which HUT interestingly comes out over 90%, which is impressive considering it’s a digital asset miner.

Our Opinion 5/10

The initial SEC investigation created a significant discount worth a speculative investment based solely on price action.

Beyond that, you have to believe the company will turn around to invest in shares.

That’s questionable.

There are so many unknowns that we’d only take a shot if and when shares take a nosedive on similar news.

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