Is Coinbase Stock a Buy? This Indicator Says All You Need to Know.

Cryptocurrency exchange Coinbase Global (COIN -5.51%) started off 2023 by soaring right out of the gate, largely buoyed by renewed optimism about the crypto market and the surprising strength of Bitcoin. But recently, sentiment has cooled, with Coinbase now facing potential regulatory action from the Securities and Exchange Commission (SEC).

So when Coinbase reports quarterly earnings on May 4, analysts are going to be looking long and hard at Coinbase’s numbers. Theoretically, if the crypto winter is indeed over, then Coinbase should be doing much better when it comes to metrics such as monthly transacting users, assets on platform, and retail trading volume. But I think this focus on retail crypto investors might be misplaced — here’s why.

Revenue diversification at Coinbase

In my view, the big story at Coinbase over the past 12 months has been revenue diversification. Coinbase management has already indicated that one priority for the company is reduced dependence on trading fees. Yes, it’s important to bring retail users back to the platform, and yes, it’s important to boost retail trading volume. But Coinbase also realizes that retail trading revenue is very cyclical. During a crypto winter, for example, this trading revenue can freeze up.

If you take a look at Coinbase’s latest 10-K, you can see how big of a step Coinbase has already taken in terms of revenue diversification. For the full year ended December 2021, consumer transaction revenue accounted for 88% of total net revenue. But for the full year ended December 2022, consumer transaction revenue accounted for just 71% of total net revenue. 

The biggest gainer on a year-over-year basis was the category that Coinbase refers to as “subscription and services revenue.” It’s a category that includes four different sub-categories: blockchain rewards, custodial fee revenue, interest income, and other. The blockchain rewards sub-category is particularly noteworthy, because this is where Coinbase reports its revenue from crypto staking.

Year over year, Coinbase’s subscription and services revenue increased by 53%, to $792.57 million in 2022. And I expect that type of performance to continue throughout 2023, especially with crypto staking increasing in popularity. For the current quarter alone, analysts are projecting revenue of between $300 million and $325 million, so this will be the number to beat. 

The new Coinbase

Subscription and services revenue will tell you all you need to know about Coinbase. From my perspective, it is the key to understanding the “new” Coinbase. The “old” Coinbase was all about retail investors, retail trading volume, and offering as many crypto tokens as possible to entice new investors.

But, again, take a good look at the most recent Coinbase 10-K. For the full year, institutional trading volume ($663 billion) dwarfed consumer trading volume ($167 billion). Put another way, big institutional clients are what is driving revenue on Coinbase, not retail money. 

Image source: Getty Images.

As a result, the “new” Coinbase is going to focus a lot more on subscription and services revenue that is tied directly to the needs of its biggest institutional customers. A good example of this is custodial revenue, which refers to the money that Coinbase makes by keeping its customers’ crypto in cold storage, making it harder for hackers to access.

Another example of service revenue is the money that Coinbase makes by offering staking services to customers. If you wonder why Coinbase is going at the SEC so hard over staking, it’s because this is turning into a viable source of revenue for Coinbase. Barring any type of SEC enforcement action, this staking revenue number should continue to increase in 2023.

Should you buy Coinbase?

Right now, the consensus is that Coinbase will narrowly beat analyst expectations for revenue and earnings on May 4. As soon as earnings drop, everyone will be discussing consumer transaction revenue and the number of monthly transacting users. But don’t forget to keep a close eye on subscription and services revenue.

If this number comes in higher than expectations, that’s when you’ll know Coinbase is a buy. It means that Coinbase is delivering on its promise to diversify its revenue stream, and that the transformation from the “old” Coinbase to the “new” Coinbase remains on track.