Crypto volatility creates poor financial results

Cryptocurrencies have had a bumpy road in recent years as it seemingly followed a typical boom-bust cycle. Investors were believed to be better off owning the marketplace producers rather than the cryptocurrencies themselves. That didn’t turn out to be the case, especially with major crypto exchanges like Coinbase Global Inc. (NASDAQ:COIN). The company’s shares suffered along with the currencies.

Coinbase provides financial infrastructure and technology for the crypto economy on a global basis. The offerings include the operation of primary financial accounts for retailers, a marketplace with a pool of liquidity for transactions in cryptoassets for institutions and individuals, and technology services that enable cryptoecosystem partners to build crypto-based applications and securely accept cryptoassets as payment. The company’s mission is to be a safe and legal entry point for retail investors and institutions that want to be involved in cryptocurrency trading. The company claims to have 110 million verified users, over 9,000 institutional customers and 245,000 ecosystem partners in over 100 countries.

Founded in 2012, Coinbase was a great growth story until the market downturn and cryptocurrency crash of 2022. The company’s financial results are obviously linked to the interest in cryptocurrencies and the trading of these vehicles.

Company updates

The company provided some key metrics in its latest earnings report. Trade volume grew to $830 billion in 2022, up from $193 billion in 2020. Revenue from subscriptions and services grew over 17 times to nearly $800 million, which compares to $50 million two years ago. The company said that roughly 25% of the 100 largest hedge funds in the world have chosen to onboard with Coinbase, which is a big increase from just a few at the end of 2020.

The story continues

In January 2023, the company announced a reduction in the number of employees and overall cost-saving measures. This is expected to result in a 30% reduction in operating costs in the first quarter of 2023.

On the regulatory front, the company was somewhat optimistic about how crypto politics is developing around the world. The EU’s MiCA framework was finalized in October 2022, and since then the EU and its member states have turned their attention to the operationalization and implementation of this framework. This suitable framework for crypto will be used in 27 different member nations to create predictability and stability for the industry in these nations.

Economic review

On February 21, the company reported dire operating results for 2022. Assets under management fell 71% to $80 billion, and total revenue fell 57.2% to $3.1 billion. Revenue from consumer transactions fell an impressive 65.5% to just $2.2 billion. Higher interest rates allowed it to offset some of the decline in revenue as the company was able to place customer deposits in higher-yielding government securities. Interest income increased from $10.5 million in the first quarter to $182.2 million in the fourth quarter.

Operating expenses for the year increased to $5.9 billion, creating an operating loss of $2.7 billion. Stock-based compensation totaled $1.6 billion, representing nearly 50% of revenue. Share-based compensation in the fourth came to 71% of turnover in the quarter.

Cash on hand fell 38% to $4.2 billion, primarily due to the large operating losses. The company has long-term debt of $3.4 billion, leaving a small net cash position of just $800 million.

The Coinbase platform supports investment in over 80 cryptoassets, but revenues are still very sensitive to the prices of bitcoin and Ethereum, which represent around 41% and 26% of assets on the platform.

Valuation

Coinbase is in the category of money-losing technology companies, with no net profit and likely negative cash flow this year. Valuation tools are limited, and price-sales and relative comparisons with competitors are the primary metrics that can be used. Coinbase sells at about 5x revenue, which is roughly in line with the industry. Relative valuations can be risky in a market downturn as all stocks can go down, along with the relative valuation.

The average price target for Coinbase stock of 12 analysts covering the company is $68.20, which would give about 17% upside. The highest price target is $100 and the lowest is $30.

The company does not pay dividends and does not buy back shares at this time.

Guru acts

Gurus who have recently bought Coinbase shares include Catherine Wood (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies. Investors who reduced or sold out of their positions included Chase Coleman (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

Summary

The outlook for Coinbase and cryptocurrencies is mixed, with both positives and negatives. Downwinds will include higher overall cryptocurrency prices, transparency about the regulatory environment, and market share gains against struggling competitors.

Headwinds include falling crypto prices and lower trading volatility, cyber theft, competitive pressure on prices and potentially negative global crypto regulation.

I predict that the prominent cryptocurrencies will be extremely volatile for the foreseeable future, and it may turn out that cryptocurrencies have no intrinsic value at all. That would put Coinbase in the failed tech company basket alongside the likes of Pets.com and Webvan. As such, investors may wish to wait for a significantly lower price level to create a margin of safety.

This article first appeared on GuruFocus.