This booming crypto stock is experiencing remarkable growth and profitability.
Coinbase Global (COIN 5.01%) is firing on all cylinders right now. The leading cryptocurrency brokerage and exchange operator posted a revenue gain of 116% in the first quarter (ended March 31). And in stunning fashion, it produced $1.2 billion in net income, translating to a fantastic margin of 74%.
Skyrocketing crypto prices are undoubtedly benefiting this business, whose shares have jumped 558% since the start of 2023. But with the top cryptocurrency stock still trading 35% below its peak price, you might be wondering if Coinbase is a no-brainer buy right now.
Strong momentum
Coinbase makes its money chiefly from facilitating cryptocurrency transactions for consumers and institutions, earning a fee in the process. Revenue here was up almost threefold from the 2023 first quarter.
It helps that the overall crypto market has gained 119% in value over the past 12 months. And executives like to point out that increased volatility also provides a boost.
The company is finding success in different products, like its Coinbase Prime offering for institutional investors and Coinbase One for retail traders. And with an ongoing push to have a bigger presence outside the U.S., the company generated 17% of its total revenue in the first quarter from international markets.
To provide more stability and predictability in its business model, management has emphasized the subscription and services segment, which includes things like stablecoins, staking rewards, and custodial services. This division saw its revenue rise 41% year over year, a much slower pace than the brokerage and exchange business.
I’m not sure if we can draw too many conclusions from this other than the fact that these two segments will likely ebb and flow depending on market conditions. When the crypto market is in a so-called winter, with investor interest and prices down, then subscriptions and services will feature more prominently in Coinbase’s financials because trading activity will be under pressure.
We’re seeing the opposite of that play out right now, as transactions accounted for roughly two-thirds of net revenue in the first quarter. The huge uncertainty regarding Coinbase’s near-term financials at any point in time means that investors shouldn’t extrapolate the latest quarter’s financial performance.
The market’s downturn throughout 2022 and 2023 forced the leadership team to run a more efficient organization. And so far, the results have been impressive.
I already mentioned Coinbase’s soaring profitability. This was enabled by operating expenses that remained largely flat last quarter versus the year-ago period. The company is demonstrating that it can leverage its fixed costs, leading to higher earnings as revenue grows.
Cheap or expensive?
At the start of 2023, shares of Coinbase were trading at a cheap price-to-sales (P/S) ratio of just 1.5. But after their incredible run-up in the past 17 months, they now go for a nosebleed P/S multiple of 15.5. Consequently, the stock looks extremely expensive today.
In my view, this is not exactly a no-brainer investment. The business currently carries a market cap of nearly $60 billion. And it’s benefiting from a ton of enthusiasm by the market. I’m not a buyer at these levels because I think there’s zero margin of safety.
However, for investors who want exposure to the crypto industry, there might be no better option than adding Coinbase to their portfolios. Should digital assets increase in value and become a more important part of the global economy, it’s easy to see how this company would benefit greatly by generating more transaction revenue and by making money from a growing list of infrastructure services.
If you have this kind of bullish outlook on the crypto market’s long-term prospects, as well as Coinbase’s ability to monetize that growth, then maybe the stock looks cheap right now. I don’t fall into this group, though.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coinbase Global. The Motley Fool has a disclosure policy.
