Coinbase Global (NASDAQ:COIN), one of the largest cryptocurrency exchanges worldwide with a market capitalization of $18.45 billion, went public in 2021 and is currently trading 79% below its all-time highs. Despite this, COIN has seen a remarkable resurgence in 2023, surging by 114% in the first ten months of the year, largely fueled by increased regulatory optimism surrounding cryptocurrencies.
However, there’s been an interesting development with prominent fund manager Cathie Wood choosing to offload her shares in the recent rally. Let’s explore whether investing in Coinbase stock makes sense given these latest headlines.
Coinbase’s Ties to Bitcoin Price
The performance of Coinbase is inherently linked to the prices of major cryptocurrencies like Bitcoin (BTCUSD) and Ethereum (ETHUSD). These digital assets constitute a significant portion of the exchange’s trading activity. During bullish market conditions, trading volumes tend to surge, enabling Coinbase to profit from higher fees and commissions. Conversely, in bearish markets, sentiment takes a hit, leading to reduced revenue for the exchange.
For instance, Coinbase experienced a surge in sales from $533.7 million in 2019 to $7.83 billion in 2021 as cryptocurrency prices soared. However, in the last 12 months, its sales have fallen to $2.7 billion, coinciding with Bitcoin’s current price, which is approximately 50% below its all-time highs.
Key Driver for Bitcoin’s Recent Rally
One of the primary catalysts behind Bitcoin’s recent rally to 18-month highs is investor optimism surrounding the potential approval of a spot Bitcoin Exchange-Traded Fund (ETF). Approval of Grayscale’s fund, long-awaited in the crypto community, could pave the way for more large asset management companies like BlackRock (BLK) and Invesco (IVZ) to enter the space, potentially attracting billions of dollars from investors.
Not a Perfect Proxy for Bitcoin
It’s important to note that while COIN is closely tied to Bitcoin’s price fluctuations, it is not a perfect proxy. Over the past three months, COIN has experienced a 24% decline, while Bitcoin has risen by 15%. In just the last month, COIN’s 7% gain significantly lags behind Bitcoin’s nearly 30% increase.
Diversification Efforts by Coinbase
To its credit, Coinbase has diversified its product and service offerings in recent years, reducing its reliance on volatile crypto trading volumes. For example, in 2021, transaction revenue accounted for 87% of its sales. However, in Q2 of 2023, transaction sales accounted for less than 50% of total revenue.
The company is focusing on its subscription and services business, which includes products like interest income, custodial fees, staking, and blockchain rewards. Revenue in this segment has seen substantial growth, from $45 million in 2020 to $792 million in 2023, with subscription sales more than doubling to $335.4 million in Q2.
The Need for Widespread Bitcoin Adoption
For Coinbase to remain a strong long-term investment, widespread global adoption of Bitcoin is essential. Bitcoin was created to replace traditional fiat currencies and facilitate low-cost global transactions. However, the lack of regulatory clarity has been a significant obstacle, which is why crypto-related investments have responded positively to recent signs of a potential regulatory breakthrough.
Analysts’ Outlook on COIN
Coinbase holds a first-mover advantage and is projected to end 2023 with sales of $2.78 billion, with adjusted earnings forecasted at $1.73 per share. However, COIN currently trades at 6.7 times forward sales, which is relatively high for an unprofitable company projected to incur further losses in the next fiscal year.
Among the 22 analysts covering Coinbase stock, the average recommendation is a “hold.” Six recommend a “strong buy,” one suggests a “moderate buy,” eight advise holding, two recommend a “moderate sell,” and five suggest a “strong sell.” The average target price for COIN is $83.84, which is 12.5% above the current trading price.
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