Weaker Quarter for Coinbase

No-moat-rated Coinbase COIN reported weak third-quarter results, with net revenue falling 39% from last quarter to $1.23 billion and pretax income declining 69% sequentially to $271 million. We had expected a slower quarter as Coinbase’s revenue is highly correlated to cryptocurrency prices, which were low for most of the quarter, but even when considering market conditions, these results were disappointing. The primary culprit was retail trading revenue, which was hit by retail trading volume falling from $145 billion to $93 billion in the third quarter, and lower average fees, which fell from 1.26% to 1.1% as the volume mix shifted more toward the cheaper Coinbase Pro platform. While the majority of Coinbase’s trading volume is institutional (71.6% in the third quarter), retail trading fees make up the majority of its revenue and are the primary driver of results.

We remind investors that Coinbase’s results are volatile from quarter to quarter as they are correlated to cryptocurrency markets. Since the end of the third quarter, cryptocurrency markets have rallied significantly, which should benefit the company. Coinbase’s trading volume for just the month of October was $186 billion, or 57% of its total third-quarter trading volume, and monthly active retail users climbed to 11.7 million, a new high for the firm. Despite the disappointment, our thesis for Coinbase has not changed.

As we incorporate these results, we are raising our fair value estimate to $225 per share from $201. Our fair value estimate benefited from a $20 adjustment for higher near-term transaction fee revenue as cryptocurrency markets set new highs and a $15 increase from higher projected revenue from Coinbase’s staking and new NFT businesses. These adjustments were offset by higher expenses projections as Coinbase scales up its customer service and investment spending, increasing its employee count by more than 600 to 2,781 in this quarter alone.

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