Coinbase Earnings: Strong Net Income on Investment Gains, but Trading Business Disappoints

Key Morningstar Metrics for Coinbase Global

• Fair Value Estimate: $205.00
• Morningstar Rating: ★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Coinbase Global’s Earnings

Coinbase Global COIN reported weak second-quarter results, as lower cryptocurrency volatility led to a sharp sequential decrease in trading volume. Net revenue rose 2.9% from last year but fell 27.6% sequentially to $1.42 billion.

Why it matters: Coinbase’s second-quarter net income was strong, at $1.43 billion versus just $36 million last year. However, this was entirely due to unrealized investment gains. Adjusted net income was only $33 million, as low cryptocurrency market volatility proved to be more of a headwind than expected.

• Coinbase’s overall cryptocurrency trading volume decreased 39.7% sequentially, while retail trading volume, which carries much higher fees, dropped 44.9%. This led to a 39.6% decrease in transaction revenue to $764.3 million, which was the primary cause of the disappointing quarter.
• Subscription and service revenue was more resilient, increasing 9.5% from last year but decreasing 6.1% from last quarter, to $655.8 million. That said, the sequential decrease was primarily from Coinbase’s lower-margin staking business, and overall, we consider this a positive result for the segment.

The bottom line: As we incorporate these results, we expect to maintain our $205 fair value estimate for no-moat Coinbase. Despite recently increasing our fair value estimate, we see the shares as significantly overvalued. We believe that the market is projecting too much future growth for the firm.

• As this past quarter demonstrates, cryptocurrency prices and trading activity are inherently volatile, which contributes considerable volatility to Coinbase’s quarterly results. Also, we think regulatory clarity will lead to additional competition, given the firm’s premium pricing.
• On a more favorable note, Coinbase’s stablecoin business continues to perform well. We see this segment as better defended from cryptocurrency’s volatility and future competitive pressures. However, the business does expose Coinbase to interest rate risk.