Coinbase Global (NASDAQ: CURRENCY), The longest crypto platform in the US, has seen its market value rise 225% this year, apparently pushing its valuation ahead of the business. Bitcoin (BTC-USD) is up 124% this year, and this stellar performance has been a key ingredient to Coinbase's success, as the company's revenue is highly correlated with cryptocurrency trading volumes.
Rising expectations of the approval of a Bitcoin spot ETF They have also played a role in boosting investor sentiment towards Coinbase. Despite the long road to growth, I find Coinbase highly valued today, forcing me to remain neutral on Coinbase stock.
Improving business fundamentals
In November 2021, Bitcoin prices peaked at just over $64,000. After hitting a low near $16,000 in December 2022, Bitcoin prices have recovered to $37,300 today, but previous highs appear to be a long way off. Coinbase generates most of its revenue from transaction fees, which are correlated with cryptocurrency trading volumes. During cryptocurrency bull markets, transaction revenue will surely increase, while the opposite is true in cryptocurrency bear markets.
Due to a substantial decline in cryptocurrency trading volume, Coinbase reported double-digit year-over-year revenue declines in six consecutive quarters from Q1 2022 to Q2 2023. This lackluster financial performance weighed on Coinbase stock, as expected. Bucking the trend, the company reported a modest 8% year-over-year increase in revenue in the third quarter, helped by subscription and services revenue that totaled $334 million.
Compared to the second quarter, transaction revenue decreased 12% to $289 million, while subscription and services revenue remained stable in the third quarter, which is an early indication of the stability and predictability of the subscription income.
During the third trimesterCoinbase recorded growth in USDC (USDC-USD) on its platform along with an increase in staked balances, driving subscriptions and service revenue. The company's efforts to diversify its revenue base are finally starting to contribute to its financial performance. If Coinbase can continue on this growth trajectory, the substantial volatility associated with its stock will likely reduce in the future.
For now, Coinbase mirrors the movements of major cryptocurrencies, but in the long term, the company has the potential to emerge as a crypto services provider that does not rely exclusively on trading fees.
As a result of aggressive diversification efforts, Coinbase now offers several products and solutions to retail and institutional clients. These include exchange services, escrow services, crypto debit cards, and data analytics solutions. The growing depth of Coinbase's product portfolio is likely to help the company generate long-term competitive advantages.
The company's aggressive efforts to reduce costs are also yielding encouraging results. For the third quarter, Coinbase reported a net loss of $2.3 million in revenue of $623 millionin contrast to a net loss of $545 million reported in the third quarter of 2022. This notable improvement was made possible by a reduction in selling, general and administrative expenses to just 53% of revenue compared to 72% in the quarter of the previous year. .
Amid volatility in the cryptocurrency markets, Coinbase has not been reluctant to expand into new markets. This year, the company has expanded to Brazil, Singapore and Canada and has obtained a license to also operate in Spain. This geographic expansion is hurting the company's results today, but can create value in the future if the company can replicate its success in the US in these international markets.
During the third quarter, Coinbase also obtained the necessary regulatory approval to offer derivative products, marking another important achievement. These approvals include the green light from the Bermuda Monetary Authority to offer crypto futures to eligible retail customers outside the US and the approval from the National Futures Association to offer futures to US customers through advanced trading.
According to CEO Brian Armstrong, derivatives products account for nearly 75% of global cryptocurrency trading volume, representing a market opportunity for Coinbase. As an established crypto platform, Coinbase is likely to attract traders seeking leveraged derivative products in the future, creating an opportunity for trading revenue to grow.
Is Coinbase Stock a Buy, According to Analysts?
Coinbase continues to attract investor attention and crypto markets are making a strong comeback this year. The long-awaited SEC approval of a Bitcoin spot ETF has further increased investor confidence in the company.
However, JPMorgan (New York Stock Exchange: JPM) Analyst Nikolaos Panigirtzoglou recently stated that the approval of a Bitcoin spot ETF will not immediately attract a substantial amount of money to the crypto markets. Barclays analyst Benjamin Budish shares a similar opinion, as he believes it is too early to predict how a Bitcoin ETF will contribute to Coinbase's net income in the near term.
Based on ratings from 20 Wall Street analysts, Coinbase stock has a consensus rating of Hold. He Coinbase average stock price target is $89.56, which implies a downside risk of 18% of the current market price.
This downside risk can be better understood by evaluating Coinbase's current valuation level. The company is currently valued at a forward price-to-sales multiple of close to 9.0, implying that the market is betting on stellar revenue growth in the coming years.
However, given Coinbase's reliance on short-term trading fees, paying premium prices to invest in the company seems irrational, as a cryptocurrency bear market will wipe billions of dollars in trading volume from the market.
Conclusion: Coinbase is highly valued
Coinbase is moving in the right direction by diversifying its revenue streams, expanding into new markets, and reducing costs without losing focus on growth. While these positive developments deserve praise, the company's current valuation appears to be ahead of its fundamentals, which poses a risk to investors betting on the company today.
