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

Coinbase COIN released its first-quarter earnings report on May 2. Here’s Morningstar’s take on Coinbase’s earnings and the outlook for its stock.

Key Morningstar Metrics for Coinbase

What We Thought of Coinbase’s Q1 Earnings

Coinbase reported strong first-quarter earnings, as rising cryptocurrency prices and volatility drove higher revenue, which more than doubled from last year to $1.6 billion. The company also benefited from a $737 million gain on its mark-to-market cryptocurrency assets, pushing net income to $1.18 billion from a small loss last year.
The approval and introduction of bitcoin exchange-traded funds sparked a major rally in cryptocurrency, renewing consumer interest in Coinbase’s trading platform. While favorable market conditions drove strength across several of the firm’s lines, the largest contributor was the retail trading business. Retail trading revenue increased 99% from last quarter and 184% from last year to $935.2 million.
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. The company’s 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.
Despite the strong quarter, we still see Coinbase shares as overvalued, as we think the market is over-extrapolating recent growth. Cryptocurrency is inherently volatile, and the firm is highly exposed to a potential decline in cryptocurrency prices. It still faces major regulatory challenges from its unresolved legal issues with the SEC, which cover a material portion of its business model.

Fair Value Estimate for Coinbase Stock

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.

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.

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.

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.

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 Sokhoeun Noeut.