After Earnings, Is Coinbase Stock a Buy, a Sell, or Fairly Valued?

Coinbase Global COIN released its second-quarter earnings report on Aug. 1. Here’s Morningstar’s take on Coinbase’s earnings and stock.

Key Morningstar Metrics for Coinbase

• Fair Value Estimate: $130.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Coinbase Global’s Q2 Earnings

• Coinbase reported decent second-quarter results, as high cryptocurrency prices drove revenue across the firm’s business, with revenue more than doubling from last year to $1.38 billion. That said, this was a sequential decline from last quarter, which benefited from dramatic trading volume growth due to intense volatility in cryptocurrency markets. That said, bottom-line results were messy, as a $248 million loss on its mark-to-market cryptocurrency assets left it nearly breaking even, with a net income of $36 million.
• Retail trading (Coinbase’s largest source of revenue) remains highly volatile, increasing to $664.8 million from $289 million last year but down from the $935 million reported last quarter. While the firm has grown its other revenue sources, it still relies on this business, which is a major source of its strong correlation with cryptocurrency markets.
• Coinbase is still enjoying strong growth in its more reliable subscription and services revenue, which nearly doubled from last year. Its USDC revenue increased 59% year over year and 22% quarter over quarter to $240 million. That said, Coinbase generates its stablecoin revenue through interest on collateral used to maintain the coin’s peg to the US dollar, and anticipated interest rate cuts will directly impact this revenue.
• While we have lingering concerns over price competition in the long term, given Coinbase’s high fees relative to its peers, there are no signs that it’s under any pressure. Its market share remains resilient, and average pricing has trended higher in recent quarters. We view price compression as a long-term risk but not an immediate concern, as we do not see a catalyst to drive pricing lower.

Fair Value Estimate for Coinbase

With its 2-star rating, we believe Coinbase’s stock is overvalued compared with our long-term fair value estimate of $130 per share, which translates to 32.8 times our 2024 earnings projection. Cryptocurrency markets have extended their rally into 2024, with bitcoin reaching new all-time highs. Coinbase’s results have historically been highly correlated with cryptocurrency valuations, and we do not expect this time to be an exception, with the firm’s recent trading volume coming in far above 2023 levels.

Read more about Coinbase’s fair value estimate.

Economic Moat Rating

In our view, Coinbase has no economic moat despite being the leading cryptocurrency exchange in the United States. Coinbase has carved out a strong place by positioning itself as a reliable and compliant place to buy and sell cryptocurrency in an industry filled with risk, weak security practices, and spotty regulatory enforcement. This has let it charge fees higher than many peers while building a large pool of liquidity on its platform. The company’s reputational advantages have only grown in recent years, following the collapse of one of its largest rivals, FTX, due to financial fraud. While we expect fee compression in the long term, recent events will likely allow Coinbase to continue to charge a premium in the immediate future.

Read more about Coinbase’s economic moat.

Financial Strength

Coinbase is in a strong financial position, though it is unprofitable and will likely remain so until cryptocurrency market conditions improve. The company ended December 2023 with over $5.1 billion in cash and more than $1 billion in cryptocurrency, including over $550 million in USDC, a cryptocurrency pegged to the US dollar. These assets are held against less than $3 billion in debt.

The decision to keep strong cash reserves makes sense, given how volatile the company’s revenue generation can be, and it gives Coinbase room to maneuver during prolonged weak cryptocurrency markets. We think staying relatively unleveraged will be an important step in keeping the company financially secure in the long term.

Read more about Coinbase’s financial strength.

Risk and Uncertainty

We give Coinbase a Very High Uncertainty Rating. The firm gets over half its net revenue from trading fees at its exchange business. Fees are charged as a percentage of the underlying assets, creating direct exposure to cryptocurrency prices. In 2022, Coinbase’s revenue fell more than 59% from the prior year as cryptocurrency prices collapsed. This is still a highly speculative area, and the number of active traders on Coinbase’s platform can vary sharply based on market performance. At the moment, this exposure is to the firm’s advantage, but the durability of the current market recovery is a major point of uncertainty. The company also has interest-rate exposure through its participation in USDC, which generates significant interest income.

There is also a material amount of environmental, social, and governance risk. Coinbase operates with a broad scope. It acts as an asset custodian, broker, and exchange in the cryptocurrency economy. This creates significant potential for conflicts of interest, which could lead to reputational damage or regulatory action. There are also legal and regulatory gray areas in Coinbase’s business. It is possible that some of the assets that trade on its platform could be ruled as unregistered securities forcing the firm to delist them.

Read more about Coinbase’s risk and uncertainty.

COIN Bulls Say

• Coinbase has established itself as the leading US cryptocurrency exchange, with a strong reputation for security in an industry filled with risk.
• Cryptocurrency prices increased sharply at the end of 2023, leading to higher trading volume and revenue for Coinbase.
• There is a worldwide cryptocurrency market. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally.

COIN Bears Say

• Cryptocurrency markets have historically been deeply cyclical, with long periods of low prices and depressed trading volume. This adds considerable volatility to Coinbase’s revenue flow.
• The regulatory landscape and long-term viability for cryptocurrency remain unclear, with regulators becoming more aggressive after the high-profile fraud and failure of FTX.
• The SEC has accused Coinbase of acting as an unregistered securities exchange, creating major regulatory and legal uncertainty.

This article was compiled by Leona Murray.