– By Dilantha De Silva
Coinbase Global Inc. (NASDAQ:COIN) released first-quarter financial results on May 13 that missed the mark. However, both net profit and revenue came in higher than the previous quarter as the cryptocurrency trading platform benefited from a surge in cryptocurrency prices and investor interest in digital assets. Trading transaction fees accounted for about 94% of the company’s net revenue for the first quarter.
On April 14, Coinbase went public on the Nasdaq exchange via a direct stock listing at $381 per share and was valued at as much as $100 billion. However, shares have dropped 24% since then, primarily as a result of the earnings miss and the substantial decline in bitcoin prices. The company’s decision to issue convertible bonds also seems to have negatively impacted the stock. Many Wall Street analysts expect fierce competition from rival cryptocurrency trading platforms, and this intensifying competition has led to a deterioration of investor sentiment toward Coinbase as well. Some analysts, however, claim it is too early to determine the extent to which the increasing competition will impact the company’s business in the near future.
Bitcoin dropped nearly 25% after Elon Musk reversed his decision to allow the cryptocurrency to be used as a form of payment for its cars, citing the negative environmental effects of bitcoin mining. Financial institutions in China have also been ordered not to accept cryptocurrencies as a valid source of payment for goods and services. Since Coinbase’s revenue is heavily reliant on cryptocurrency prices, a drop in bitcoin prices has a major effect on the company’s profitability. Coinbase, however, is well positioned to report stellar earnings regardless of the success of bitcoin or any other cryptocurrency in the long run. In addition, the recent pullback offers investors a good opportunity to invest in this high-growth company at a discounted price.
First-quarter earnings recap
The company reported earnings of $3.05 per share versus Wall Street’s expectations for $3.28. Revenue was $1.8 billion, up 84% from the previous quarter, and the net profit of $771 million was an increase of over 300% from the fourth quarter of 2020. Monthly transacting users increased to 6.1 million from 2.8 million as well, fueled by the increasing popularity of cryptocurrency trading among retail and professional investors. As illustrated below, the number of active users on the platform has increased substantially over the last several quarters.
Source: The Block.
Commenting on the first-quarter performance and why investors should expect highly volatile earnings in the future, Chief Financial Officer Alesia Haas said:
“I think it’s really important to understand, crypto volatility and crypto-asset prices can and have fluctuated meaningfully quarter-to-quarter. And historically, when we’re in periods where we see a high bitcoin price and higher crypto-asset price volatility. Those two factors have driven to higher trading volume and therefore higher transaction fee revenue periods for Coinbase. However, those are not assured, we could see periods of increased stability or decrease.”
The key concern raised by analysts regarding the outlook for Coinbase is the threat of increased competition from conventional banks and other crypto exchanges offering similar services as the transaction fees account for over 80% of the company’s revenue. Addressing this concern, Haas said:
“Our biggest focus right now is to keep up with the current demand. We are not focused on competing with fees, we’re not trying to even win on fees, we’re trying to win on being the most trusted, easiest to use, on providing all the assets that our customers want to transact with, on being able to provide a yield on crypto assets, the opportunity to engage in defi. On the retail side, we’re bundling custody and storage services into our trading fee and our customers really see value in the fees that we provide, based on the services. Crypto is so dynamic and is expanding and evolving every single week, which is to say, this is not a commodity service, and therefore, fees are not the sole basis that customers select who they engage with.”
Although its fees are higher than its competitors, Coinbase offers attractive security features, and cryptocurrencies traded on its platform are insured against online breaches. Retail traders, so far, seem to have taken a liking to these premium features, which is evident from the strong revenue growth of Coinbase despite charging much higher fees than its closest rivals.
The outlook is promising despite short-term uncertainties
Digital currencies have gained the interest of both retail and institutional investors in recent months. In 2020, bitcoin was the best-performing asset class, and this stellar performance has boosted its recognition as an asset class that is expected to perform well during difficult economic times. Bitcoin continues to make headlines because of positive macroeconomic developments, including the growing acceptance of cryptocurrencies by major financial institutions such as The Goldman Sachs Group Inc. (NYSE:GS) and PayPal Inc. (NASDAQ:PYPL).
Bitcoin prices have increased more than 30% in 2021, but have tumbled in recent months after Chinese regulators announced that financial institutions should not accept digital currencies for commercial transactions. Elon Musk, on the other hand, said Tesla Inc. (NASDAQ:TSLA) will not accept bitcoin as a form of payment for its electric vehicles.
Tesla made a $1.5 billion investment in the cryptocurrency earlier this year, but is unlikely to make any further investments going by these recent comments. What is evident from these developments is that cryptocurrencies will face a bumpy ride in the coming months, but the average trading volumes are likely to see continued growth as retail investors are well and truly getting behind digital assets.
According to a research report published by Facts and Factors Market Research, the global cryptocurrency trading industry will grow at a compounded annual rate of 30% through 2026. The cryptocurrency industry’s key growth drivers will be the transparency of blockchain technology, growing acceptance in developing countries, favorable monetary policy regulations and a significant increase in venture capital investments. These factors will help industry leaders such as Coinbase report higher transaction and trading revenue in the coming years.
Although the unpredictable nature of cryptocurrencies makes it difficult to forecast Coinbase’s revenue, profit and trading growth, the business is well positioned to benefit from the positive industry outlook. In a research note to clients, Wedbush analyst Dan Ives wrote:
“Coinbase is a foundational piece of the crypto ecosystem and is a barometer for the growing mainstream adoption of Bitcoin and crypto for the coming years.”
Takeaway
Coinbase is the leading cryptocurrency exchange in the United States and the first major crypto-focused company to offer more than 50 digital assets for trading. The crypto markets are still in their very early stages, but with rising demand for digital assets, Coinbase is well positioned to report good numbers as it continues to concentrate on providing customer-friendly, secure solutions to gain access to this booming industry.
The company has been instrumental in bringing digital currencies to a wider audience. Coinbase’s efforts to simplify the process involved in crypto trading have made it the leading platform for investors interested in digital currencies in many regions of the world. There is no way to predict whether bitcoin or any other existing cryptocurrency will make it big in the future, but digital assets are here to stay, which is evident from the recent investments by the Chinese government to launch a state-owned digital currency. As the industry evolves and moves into the next growth phase, Coinbase will play a major role by facilitating the transaction of digital currencies. The recent pullback of the share price, therefore, offers growth investors with above-average risk tolerance a good opportunity to invest in Coinbase at a reasonable valuation level.
Disclosure: The author does not own any stocks mentioned in this article.
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This article first appeared on GuruFocus.