Coinbase (COIN) made its debut on the technology index Nasdaq during the cryptocurrency market rally. But slowly a year later, the cryptocurrency exchange was dragged down as cryptocurrency prices dropped. With Coinbase shares now 85% cheaper than when they were trading at their all-time highs, we've investigated whether they're a bargain at these prices, or if they're cheap for some reason.
Are they bringing in enough money through cryptocurrencies?
Coinbase's latest quarterly report came out this month. And at first glance, the results were not very good. Last quarter, the exchange generated net income (sales less direct sales-related expenses) of $1,160 billion. The recent decline in the cryptocurrency market has a lot to do with it. Those numbers are less than half of what it grossed in the previous quarter ($2,490 billion), worse than any previous quarter.
Coinbase net income. Source: Coinbase Shareholder Letter Q1 2022.
Coinbase has two types of revenue: trading revenue (total transaction revenue) and other product and service revenue (total subscription and service revenue). As we can see in the chart below, trading revenue declined by approximately 55% last quarter and overall appears to be trending downward. That's to be expected: after all, we are in a bear market in cryptocurrencies and there are fewer investors buying and selling cryptocurrencies.
Total quarterly net revenue from Coinbase transactions. Source: Coinbase Shareholder Letter Q1 2022.
But on the other side of the coin, the exchange appears to be building its revenue streams outside of cryptocurrency trading. Net income from everything other than trading fell less in the latest quarter (about 35%) and is higher than the first three quarters of last year. So despite last quarter's drop, it still appears to be trending upward over time, just like the cryptocurrency market.
Coinbase total net quarterly revenue (excluding trading).Source: Coinbase Shareholder Letter Q1 2022.
Are they spending too much on the cryptocurrency industry?
Last quarter, Coinbase spent $1.700 billion, more than any of the previous four quarters. Here we have a breakdown of your expenses (thank goodness they are not ours...) :
Coinbase operating expenses. Source: Coinbase shareholder letter Q1 2022.
Digging deeper into the numbers, we can see that Coinbase is preparing for the future growth of the cryptocurrency ecosystem. Employee headcount rose nearly 33% during the last quarter and the company spent 24% more on technology and development. It also has about $6.000 billion in cash, which it can use to continue building if the cryptocurrency bear market decline continues. All in all, these events could bear fruit in the long term.
Has Coinbase Stock Hit Bottom Like Cryptocurrencies?
Let's look at the technical aspects of the stock. Each bar on the chart below represents one week of price action. We see that last week investors “capitulated” (that is, they threw in the towel) and sold their shares at huge losses. This often happens when the price approaches the lows. In general, we can see that three things suggest a capitulation:
- The price became really volatile last week, with Coinbase's weekly Bollinger Bands getting wider and wider. Cryptocurrencies were losing at the same time.
- The price broke well outside the lower Bollinger band, hitting a weekly low of $41 before ending the week near $68, meaning buyers were buying the dip with conviction. Let's remember the direct correlation of Coinbase shares with the cryptocurrency market.
- This all happened during a record spike in trading volume, showing extreme panic selling coinciding with the cryptocurrency market meltdown.
Coinbase stock price on a weekly basis. Source: TradingView.
And while this capitulation is a good sign, it is too early to know if rock bottom has been reached. The cryptocurrency market remains sideways, the price could easily fall again to retest new lows several times and build a base from which to mount its next bullish assault. Zooming in on the daily chart (where each bar represents one day's price action), we can see that a trading range between $41 and $74 is starting to form. For shorter-term trades, a break above the $74 high could signal an upcoming rally in the cryptocurrency market and therefore an opportunity to buy, but we may want to use a limit order of losses to manage risk.
Coinbase stock price on a daily basis. Source: TradingView.
If cryptocurrencies are at a support, is it a good time to enter Coinbase?
We are no longer in a bull market in cryptocurrencies, and investors are much less enthusiastic about Coinbase than when it was first listed a year ago during the cryptocurrency rally. Ark Investment Cathie Wood's, which invests in innovative companies in industries it believes have massive growth potential, raised $30 million in Coinbase shares in the recent dip. Perhaps Cathie has bought into the recent cryptocurrency crash through Coinbase.
Information about Ark's investment in Coinbase. Source: Ark Invest
Sure, Coinbase just made a new revelation that wasn't so well received by its customers: if it ever goes bankrupt, it may have to treat customers' cryptocurrencies as company debt to fend off hungry creditors. It doesn't look good, but they had to disclose it since they are a US public company that deals in cryptocurrencies. The company's regulatory duties could also slow it down when launching new cryptocurrency products, as everything must be approved with the regulator first.
Current situation of cryptocurrency regulation globally. Source: Medio16
But Coinbase is playing the long game with regulation, and that could pay off big down the road. Given what just happened with Earth Moon, authorities are likely to take a more critical look at cryptocurrencies in the future. And when it comes to compliance, Coinbase has a strong start on competing exchanges like Binance and FTX, so it should weather the cryptocurrency regulatory storm better than others.