Is Coinbase Global a Buy?

Coinbase Global (NASDAQ:COIN), one of the largest cryptocurrency trading platforms in the world, went public through a direct listing last April with a reference price of $250 per share. The stock started trading at $381, hit its all-time high of $429.54 that day, and closed at $328.28.

The bulls initially loved Coinbase because cryptocurrencies were on fire. On the day that Coinbase went public, a single Bitcoin (CRYPTO:BTC) cost $63,110, and an Ether (CRYPTO:ETH) token was worth $2,435. But today Bitcoin trades at about $39,000, and Ether is at about $2,600 — well below its all-time high of $4,891.70 last November.

Coinbase only faced moderate regulatory headwinds at the time of its debut. But since then, regulators in multiple countries, including the United States, have started to closely scrutinize cryptocurrencies. The U.S. Securities and Exchange Commission (SEC) even forced Coinbase to cancel Lend, a new feature that would have enabled its users to lend out their USD Coins (tethered to the U.S. dollar) for interest, last September.

To make matters worse, inflation and rising interest rates caused investors to sell high-growth tech stocks like Coinbase, and Russia’s invasion of Ukraine exacerbated that sell-off. As a result, Coinbase’s stock trades at about $166 as of this writing. Should investors take the contrarian view and buy some shares of this beaten-down growth stock today?

How fast is Coinbase growing?

Coinbase’s growth rate has been jaw-dropping. Its revenue surged 144% to $1.28 billion in 2020, then skyrocketed 545% to $7.36 billion in 2021. It posted a net loss in 2019, but turned profitable in 2020 with $322 million in net income, which surged a whopping 1,025% to $3.62 billion in 2021.

Coinbase generates nearly all of its revenue from cryptocurrency transactions. Therefore, its long-term growth depends on three main things: its monthly transacting users (MTUs), its trading volume, and the total assets stored across its platform. All three metrics soared by triple digits in 2021:

Data source: Coinbase.

But if we break down Coinbase’s growth on a quarterly basis, we’ll notice that its sequential growth is pretty bumpy:

Data source: Coinbase.

Coinbase’s sequential declines in MTUs and trading volume in the third quarter, which CFO Alesia Haas attributed to lower “trading volume across the entire crypto stock market,” rattled a lot of investors. However, its MTUs and trading volumes rose sequentially in the fourth quarter as cryptocurrency trades accelerated worldwide. But in the first quarter of 2022, Coinbase expects both metrics to dip sequentially again.

Coinbase’s full-year forecast is also broad and vague. It expects to finish 2022 with five to 15 million MTUs, which translates to anything between a 56% year-over-year decline and 32% growth for the year. However, those expectations suggest that Coinbase’s growth is peaking, and that competing exchanges like Binance and diversified fintech platforms like Block‘s (NYSE:SQ) Cash App are carving up the fragmented market.

The expectations and valuations

Analysts expect Coinbase’s revenue to decline 4% in 2022 and rise 17% in 2023, but investors should be skeptical of those forecasts because they’re pinned to the unpredictable cryptocurrency market. But based on those expectations, Coinbase trades at about four times this year’s sales.

For reference, Block trades at just three times this year’s sales, but it’s expected to grow its revenue 9% in 2022 and 54% in 2023. Block also generates a significant percentage of its revenue from Bitcoin trades, but the growth of its seller-oriented services partly offsets that volatility.

Analysts expect Coinbase’s net income to plunge to nearly breakeven levels in 2022 as it ramps up its spending and integrates its recent acquisitions, which include companies like FairX, Agara, Unbound Security, and BRD. Analysts expect its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to drop 41% in 2022 before rising 14% in 2023.

Based on those estimates, Coinbase trades at 15 times next year’s adjusted EBITDA. That makes it look significantly cheaper than Block, which trades at more than 40 times next year’s adjusted EBITDA. 

Is Coinbase worth buying?

Coinbase might seem reasonably valued compared to Block and other high-growth fintech companies. But it also isn’t a screaming buy right now.

The company’s long-term growth is still pegged to the market’s uneven interest in cryptocurrencies, and a market crash could prevent new users from signing up while causing its trading volume to grind to a halt. It also arguably makes more sense to directly buy Bitcoin or other cryptocurrencies than to invest in Coinbase’s capital-intensive business.

Therefore, Coinbase isn’t a compelling buy yet. It might be worth a fresh look if the crypto market stabilizes, but I suspect it will drop even further as the macro headwinds keep investors away from speculative tech stocks.