Coinbase, the largest U.S. cryptocurrency exchange, remains financially strong with over $2 billion in quarterly revenue and $390 billion in trading volume. Beyond trading, Coinbase has expanded into stable revenue streams like staking, custody, and its own blockchain network, Base. In today’s FA Alpha Daily, we will explore the company’s long-term growth despite regulatory uncertainty and crypto price swings.
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Bitcoin ETFs only began trading on major stock exchanges in January 2024, with the approval of the first United States spot Bitcoin ETFs by the Securities and Exchange Commission (“SEC”).
Stock market investors previously had limited ways to gain exposure to cryptocurrency markets.
One such avenue was through the publicly traded stock of major cryptocurrency exchange platforms.
Coinbase Global (COIN), which operates the Coinbase cryptocurrency exchange, was one of the first major platforms to go public via a direct listing on the Nasdaq stock exchange in April 2021.
As the largest cryptocurrency exchange in the United States, Coinbase generates the majority of its revenue through transaction fees and commissions charged on cryptocurrency trades made on its platform.
It also offers other services correlated with overall crypto demand, like margin trading, where investors can borrow funds to amplify their trades, as well as facilitating initial coin offerings (“ICOs”) for new cryptocurrency projects.
Due to its direct tie to cryptocurrency trading volumes, Coinbase stock provided a higher risk/higher reward way for mainstream investors to gain indirect exposure to fluctuations in the prices of digital assets like Bitcoin without having to purchase the cryptocurrencies themselves.
The company’s stock has dropped sharply over the past few months, but the business itself is performing better than ever.
Coinbase just reported another quarter with over $2 billion in revenue, driven by $390 billion in trading volume.
Even with Bitcoin’s recent price swings, activity on Coinbase remains strong. April alone saw $100 billion in trades, far from the low activity you’d expect in a bear market.
Despite this, fears about a crypto downturn have pushed the stock down over 30% since February.
This reaction ignores a key fact… Coinbase is no longer just a trading platform.
The company has spent years building products that generate steady revenue, even if crypto markets slow down.
Subscription and services like custody solutions, staking rewards, and blockchain infrastructure have grown rapidly, hitting $2.3 billion last year.
Partnerships like the one with PayPal to promote its stablecoin and the growth of the Base, Coinbase’s own blockchain network, are opening new revenue streams.
Base alone brought in $70 million last quarter, and Coinbase expects it to grow significantly as more developers and users adopt the platform.
These efforts are supported by a U.S. regulatory environment that’s increasingly open to crypto innovation.
All of these factors combined enabled the company to achieve a 34% Uniform return on assets ”ROA” and 32% asset growth last year.
Despite this strong performance, its stock trades at a modest Uniform P/E ratio of 18x, mainly because the market worries about unclear regulations and the ups and downs of crypto prices.
Our EEA model clearly shows this.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market expects the firm’s Uniform ROA to decline to 16% from 34% last year.
The market is concerned about regulatory risks and the company’s spending on growth initiatives, but Coinbase has $7 billion in cash to weather uncertainty.
Its focus on compliance and partnerships with traditional financial players reduces regulatory risk compared to smaller crypto firms.
The market is pricing Coinbase as if another crypto winter is here, but the numbers tell a different story.
Trading volumes are healthy, new revenue streams are growing fast, and Bitcoin’s cycle still has potential.
With its strong market position, diverse revenue sources, and the potential for more people to adopt cryptocurrencies, Coinbase is well-positioned for growth despite market swings.
For investors who want exposure to crypto through traditional markets, Coinbase offers significant potential if digital asset adoption continues to accelerate.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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