Coinbase Global (NASDAQ:COIN), the largest cryptocurrency platform operator in the United States, has lost a staggering 86% of its market value amid volatile crypto prices this year. With many investors looking down on crypto, Coinbase’s outlook seems bleak today. Empirical evidence suggests Coinbase stock is strongly correlated to Bitcoin (BTC-USD) prices, which explains the bloodbath in Coinbase stock this year, as Bitcoin has lost 65% of its market value in 2022.
There is a lot of uncertainty regarding the future of digital assets, but a closer look at Coinbase’s prospects suggests the company could be undervalued today. I am bullish on Coinbase stock, but short-term-oriented investors should probably avoid the company, as it could take years for the investment thesis to come to fruition.
Silver Linings amid Dark Clouds
In the third quarter, Coinbase reported a 55% year-over-year decline in revenue to $590.34 million, and its net loss came to $545 million. The massive hit to the company’s revenue came in the form of an erosion of transaction revenue. On a sequential basis, transaction revenue declined by a staggering 44%, highlighting how the company lost momentum from the second to the third quarter of this year. These negative developments sent Coinbase stock crashing to new lows following the earnings release in early November.
Although it seems reasonable for investors to focus on the negative developments, it also makes sense to remain objective.
Coinbase’s Q3 earnings provide investors with a few reasons to be optimistic about the company’s future. First, the company served 8.5 million monthly transacting users (MTUs) in Q3 compared to 7 million MTUs in the comparable quarter last year. This is a positive development as Coinbase is continuing to add new users globally at a time when investors are dumping risky assets.
Second, Subscription and Services revenue surged 43% sequentially to $211 million in Q3, suggesting that the company’s efforts to build a recurring revenue stream are yielding results already. Interest income, which is recognized under subscription revenue, contributed the most to this stellar performance as the company benefited from rising interest rates. This is an encouraging development from the perspective of long-term-oriented investors, as depending on transaction fees will result in high revenue volatility compared to subscription revenue, which is likely to remain stable even during times of heightened market volatility.
Coinbase’s Long-Term Outlook Remains Promising
Coinbase is not just a crypto broker or trading platform – the company serves as an exchange, custodian of assets, broker, and even a financial services company that caters to demands at different life cycles of cryptocurrency adoption.
The 360-degree product suite offered by the company should lead to competitive advantages in the long run. Coinbase already charges higher-than-average commissions and fees from its customers, and these customers seem to be happy to pay a premium because of Coinbase’s vast product offering and regulatory compliance. These are early signs of an economic moat resulting from a differentiated business model.
Coinbase is scaling down operationally to improve the efficiency of its business while cutting down some costs, which is another positive development. Operating expenses declined by 38% in the third quarter compared to the previous quarter, which is a sign that cost-cutting initiatives are delivering results without hampering the company’s growth potential. In 2020 and 2021, Coinbase aggressively spent millions of dollars on new product development and people, attracting criticism from Wall Street analysts. Today, the company is reversing course.
Cryptocurrency adoption continues to gain momentum, but it is difficult to predict which cryptocurrencies will survive and thrive in the long run. This uncertainty, primarily resulting from regulatory intervention, makes investing in cryptos inherently riskier than other assets. Coinbase, a company closely related to the crypto industry but without the regulatory risks associated with individual cryptos, provides investors with a better investment opportunity to bet on the future of crypto assets as a whole.
Is COIN Stock a Buy, According to Analysts?
Amid the FTX collapse, Wall Street is sending mixed signals regarding Coinbase and other crypto companies. Considering the company’s strong liquidity position, prudent cost management, and long growth runway in the next business cycle, Piper Sandler analyst Richard Repetto defended Coinbase earlier this month. BofA Securities analyst Jason Kupferberg, however, downgraded Coinbase last November, citing that the company is not immune to crypto market shocks despite its industry-leading liquidity position.
Nonetheless, COIN has a Moderate Buy consensus rating, and its average price target is $71.06 based on the ratings of 20 Wall Street analysts, which implies upside potential of 104.3% from the current market price.
Takeaway: COIN is a Stock for Growth Investors
Uncertainty and volatile market conditions often create opportunities for investors. Today, the dark clouds hanging over the crypto industry are presenting opportunities for growth investors with an extensive investment time horizon. After shedding 86% of its market value this year, Coinbase looks like an appealing opportunity that is hidden in plain sight.
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