After Earnings, Is Coinbase Stock a Buy, a Sell, or Fairly Valued?

Coinbase Global released its third-quarter earnings report on Oct. 30. Here’s Morningstar’s take on Coinbase’s earnings and stock.

Key Morningstar Metrics for Coinbase Global

• Fair Value Estimate: $150.00
• Morningstar Rating: 1 star
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Coinbase Global’s Q3 Earnings

• Coinbase’s results weakened from the previous quarter due to lower trading volume, but they were still well above last year’s level, with revenue decreasing 17% sequentially but increasing 81% year-over-year.
• Cryptocurrency volatility has decreased since the first quarter, which has impacted the firm’s trading volume and revenue. US cryptocurrency volume fell an estimated 18% from the previous quarter, helping drive Coinbase’s transactional income down to 27% in the same period.
• Coinbase’s subscription and service revenue held up better, falling only 7% sequentially, but it also faced headwinds from falling interest rates and cryptocurrency prices.
• Since the US presidential election, cryptocurrency prices have rallied dramatically, with Bitcoin hitting new all-time highs, since markets expect a more favorable regulatory environment. This will likely lead to higher trading volume and custody service revenue for Coinbase, as well as the potential to see its issues with the SEC resolved.
• Despite this, we see Coinbase as substantially overvalued, as we believe the shares have risen too sharply relative to the benefits to the firm.

Fair Value Estimate for Coinbase Global

With its 1-star rating, we believe Coinbase stock is overvalued compared with our long-term fair value estimate of $150 per share, which translates to 27 times our 2024 earnings projection. Coinbase’s largest source of revenue is trading fees, which are assessed as a percentage of the amount being traded on its platform. This ties the firm’s long-term revenue growth to the size of the overall cryptocurrency asset class and its market share. Cryptocurrency is still a speculative asset class, and the number of available cryptocurrencies to trade, the space’s eventual market capitalizations, and even its continued existence are still major unknowns.

Read more about Coinbase’s fair value estimate.

Economic Moat Rating

In our view, Coinbase has no economic moat despite being the leading cryptocurrency exchange in the United States. Coinbase has carved out a strong place by positioning itself as a reliable and compliant place to buy and sell cryptocurrency in an industry filled with risk, weak security practices, and spotty regulatory enforcement. This has let it charge fees higher than many peers while building a large pool of liquidity on its platform. The company’s reputational advantages have only grown in recent years, following the collapse of one of its largest rivals, FTX, due to financial fraud. While we expect fee compression in the long term, recent events will likely allow Coinbase to continue to charge a premium in the immediate future.

Read more about Coinbase’s economic moat.

Financial Strength

Coinbase is in a strong financial position, though it is unprofitable and will likely remain so until cryptocurrency market conditions improve. The company ended June 2024 with over $7.2 billion in cash and more than $2.2 billion in cryptocurrency, including over $1 billion in USDC, a cryptocurrency pegged to the US dollar. These assets are held against $4.2 billion in debt.

The decision to keep strong cash reserves makes sense, given how volatile the company’s revenue generation can be, and it gives Coinbase room to maneuver during prolonged weak cryptocurrency markets. We think staying relatively unleveraged will be an important step in keeping the company financially secure in the long term.

Read more about financial strength.

Risk and Uncertainty

We give Coinbase a Very High Uncertainty Rating. The firm gets over half its net revenue from trading fees at its exchange business. Fees are charged as a percentage of the underlying assets, creating direct exposure to cryptocurrency prices. In 2022, Coinbase’s revenue fell more than 59% from the prior year as cryptocurrency prices collapsed. This is still a highly speculative area, and the number of active traders on Coinbase’s platform can vary sharply based on market performance. At the moment, this exposure is to the firm’s advantage, but the durability of the current market recovery is a major point of uncertainty. The company also has interest-rate exposure through its participation in USDC, which generates significant interest income.

There is also a material amount of environmental, social, and governance risk. Coinbase operates with a broad scope. It acts as an asset custodian, broker, and exchange in the cryptocurrency economy. This creates significant potential for conflicts of interest, which could lead to reputational damage or regulatory action. There are also legal and regulatory gray areas in Coinbase’s business. It is possible that some of the assets that trade on its platform could be ruled as unregistered securities forcing the firm to delist them.

Read more about Coinbase’s risk and uncertainty.

COIN Bulls Say

• Coinbase has established itself as the leading US cryptocurrency exchange, with a strong reputation for security in an industry filled with risk.
• Cryptocurrency prices increased sharply at the end of 2023, leading to higher trading volume and revenue for Coinbase.
• There is a worldwide cryptocurrency market. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally.

COIN Bears Say

• Cryptocurrency markets have historically been deeply cyclical, with long periods of low prices and depressed trading volume. This adds considerable volatility to Coinbase’s revenue flow.
• The regulatory landscape and long-term viability for cryptocurrency remain unclear, with regulators becoming more aggressive after the high-profile fraud and failure of FTX.
• The SEC has accused Coinbase of acting as an unregistered securities exchange, creating major regulatory and legal uncertainty.

This article was compiled by Kayleigh Hall.