On November 9, after the regular stock market close, Coinbase Global, Inc. (NASDAQ: COIN), the operator of the world’s largest cryptocurrency trading platform, reported disappointing 3Q 2021 earnings, a marked departure from strong results in the previous two quarters. Based on these results, the stock’s valuation, even after a significant decline in after-hours trading, looks quite stretched.
Surprisingly, both total trading volume and the quantity of active users sequentially declined 29% and 16%, respectively, even though the prices of most digital currencies reached important bottoms in mid-July and rallied strongly over the last half of the quarter.
Remarkably, net revenue declined around 40% to US$1.2 billion in 3Q 2021 from US$2.0 billion in 2Q 2021. Adjusted EBITDA suffered a similar 46% sequential fall to US$618 million in the quarter.
Based on a share price of US$312, Coinbase’s enterprise value (EV) is around US$85 billion. Its trailing twelve months revenue and adjusted EBITDA for the period ended September 30, 2021 total US$5.4 billion and US$3.2 billion, respectively. This implies that the company’s EV-to-revenue and EV-to-adjusted EBITDA ratios are 15.7x and 26.5x, respectively, both extremely high figures, particularly for a company with uncertain growth prospects. It is difficult to assign growth company status to a company which just suffered a 40+% sequential quarterly revenue decline.
| (in millions of U.S. dollars, except otherwise noted) | 3Q 2021 | 2Q 2021 | 1Q 2021 | 4Q 2020 |
| Monthly Transacting Users (Mill.) | 7.4 | 8.8 | 6.1 | 2.8 |
| Retail Trading Volume | $93,000 | $145,000 | $120,000 | $32,000 |
| Institutional Trading Volume | $234,000 | $317,000 | $215,000 | $57,000 |
| Trading Volume | $327,000 | $462,000 | $335,000 | $89,000 |
| Retail Assets on Platform | $116,000 | $88,000 | $101,000 | $45,000 |
| Institutional Assets on Platform | $139,000 | $92,000 | $122,000 | $45,000 |
| Total Assets on Platform | $255,000 | $180,000 | $223,000 | $90,000 |
| Total Market Capitalization of All Crypto Assets | $2,090,000 | $1,610,000 | $1,980,000 | |
| % on Coinbase Platform | 12.2% | 11.2% | 11.3% | |
| Transaction Revenue | $1,090 | $1,930 | $1,541 | $476 |
| Subscription/Services Revenue | $145 | $102 | $56 | $21 |
| Net Revenue | $1,235 | $2,033 | $1,597 | $497 |
| Adjusted EBITDA | $618 | $1,150 | $1,117 | $288 |
| Net Income | $406 | $1,606 | $771 | $177 |
| Cash, Including Digital Assets | $6,353 | $4,366 | $1,983 | $1,062 |
| Debt – Period End | $3,496 | $1,520 | $118 | $108 |
| Shares Outstanding (Millions) | 261.9 | 209.9 | 85.7 | 73.1 |
We also note that cryptocurrencies may continue to increase in value as investors become more open to alternative investments. However, it may be difficult to replicate the percentage increase in digital currency values that occurred from October 1, 2020 through September 30, 2021. In other words, the cryptocurrency environment over the most recent twelve month period may have been “as good as it gets.”
Approximately US$255 billion of crypto assets were held on Coinbase’s platform as of September 30, 2021. This represents 12.2% of the approximate US$2.1 trillion market value of all digital currencies on the same date. Given the generally non-proprietary nature of Coinbase’s financial markets technology, it seems likely that competitors will in time break in and take some of Coinbase’s market share.
Perhaps most importantly: given Coinbase’s disappointing 3Q 2021 results in the face of, at the very least, a fairly constructive overall crypto market in the quarter, a fair question is why would an investor invest in Coinbase shares in preference to a direct investment in, say, Bitcoin. On that score, we do not have a good answer. If an investor is bullish on Bitcoin, and the digital currency appreciates in value, the investor will make money. Based on Coinbase’s results this quarter, the same cannot necessarily be said regarding an investment in the stock.
If Bitcoin and Ethereum continue to rally strongly, investors may choose to ignore Coinbase’s 3Q 2021 results and purchase the shares as a play on cryptocurrencies.
Coinbase’s weak results in 3Q 2021 illustrate the complexities of running an investing platform which depends on investors’ continuing to trade a volatile commodity. At Coinbase’s current extended valuation, an investment in one of the digital currencies seems to have better risk-reward characteristics than the company’s shares.
Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
