Stock of the week - Coinbase (05.09.2024)

Coinbase shares are currently trading at $163, down more than 13% this week, reflecting ongoing volatility in the cryptocurrency market and regulatory uncertainties. This comes after the company reported Q2 2024 results and has been actively involved in political spending ahead of the 2024 U.S. elections.

Key financial data:

• Revenue: $1449.6 million in Q2 2024, up 110.6% year-over-year and down 11.5% quarter-over-quarter
• Net income: $36.2 million in Q2 2024, compared to a loss of $1093.7 million a year ago
• Adjusted EBITDA: $70.3 million in Q2, compared to a loss of $34.7 million a year ago

Quarterly earnings breakdown:

• Transaction revenue: $780.9 million in Q2, up 138% year-over-year but down 27% quarter-over-quarter
• Subscription and services revenue: $599 million in Q2, up 79% year-over-year and 17% quarter-over-quarter
• Bitcoin and Ethereum trading volume: 54% of total in Q2, up from 50% in Q1
• Operating expenses: $1.25 billion in Q2, down 4% quarter-over-quarter

Key business metrics:

• Operating margin: -5.2% in Q2 2024
• Net margin: 3.1% in Q2 2024
• Revenue CAGR (1 year): -2.7%
• Net income CAGR (2 year): -83.8%
• Total trading volume: $226 billion in Q2, down 28% from Q1

Coinbase, a leading cryptocurrency exchange platform, is navigating a complex landscape of market volatility, regulatory challenges, and political engagement. The company's Q2 2024 results demonstrate its resilience in the face of these challenges, with significant year-over-year growth in both revenue and profitability.

The company's business model is evolving, with a growing emphasis on subscription and services revenue, which now accounts for 41% of total revenue. This diversification strategy aims to reduce reliance on volatile transaction revenues and build a more stable income stream. The growth in USDC stablecoin revenue and blockchain rewards has been particularly strong, indicating increasing institutional adoption of cryptocurrencies.

Coinbase's financial position remains solid, with $7.2 billion in cash and $589 million in USDC on its balance sheet, against $4.2 billion in debt. This net cash position provides a buffer against market volatility and potential regulatory headwinds.

The company's active involvement in political spending, contributing $50 million to the 2024 U.S. elections, underscores its commitment to shaping the regulatory landscape for cryptocurrencies. This proactive approach aims to create a more favorable environment for crypto businesses but also exposes the company to potential political and regulatory risks.

The growing institutional interest in cryptocurrencies, as evidenced by the launch of Bitcoin ETFs and increasing allocation by traditional financial institutions, presents significant growth potential. However, the company must navigate ongoing regulatory scrutiny, potential fee compression from competition, and the inherent volatility of the crypto markets.

CFO Alesia Haas's statement on maintaining elevated policy spending through the U.S. elections and beyond highlights the company's global ambitions and the importance it places on regulatory clarity. The achievement of six consecutive quarters of positive adjusted EBITDA demonstrates Coinbase's commitment to profitability across various market conditions, a key factor in building long-term investor confidence.

While the current valuation metrics and analyst recommendations suggest potential upside, investors should carefully consider the regulatory risks and market volatility inherent in the cryptocurrency sector. Coinbase's future performance will likely depend on its ability to navigate these challenges while capitalizing on the growing mainstream adoption of digital assets.

Valuation:

We decided to base our assumptions on CAGR growth. We have assumed a 30% revenue growth and 40% operating margin for the 5 years of forecasts. Decision to make 5 years of detailed forecasts rather than 10 years was made due to huge uncertainty over whether company's robust growth rates will last. Other assumptions were based on 5-year averages. 

As terminal value tends to account for a significant part of DCF valuation, especially with shorter periods of detailed forecasts, we have decided to take a very conservative approach here. For the terminal value calculations we have used a 5% revenue growth as well as 12% terminal WACC, down from 13% WACC used for 5 years of forecasts to capture the effect of AI business maturing. 

Such a set of assumptions provides us with an intrinsic value of $163.23 per share which is close to the current market value of the company.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions. 

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Next, let's take a look at how Coinbase compares with peers. We have constructed a peer group consisting of 4 companies, whose business model might be similar to Coinbase: Block, Paypal, Affirm and Corpay. As can be seen Coinbase is above the mean for the peers in almost every aspect.

We have calculated mean, median as well as cap-weighted multiples for the peer group. Three different Coinbase valuations for each of those multiples were later calculated. As one can see in the table below, the vast majority of those suggest that Coinbase shares are overvalued at current prices. 

Recommendations: Coinbase has 31 recommendations, with 15 "buy" and highest price of $400, 12 "hold", and 4 "sell" ratings with lowest at $130. The 12-month average stock price forecast is $246.65, implying a 51.1% upside potential from the current price.

Technical analysis: The price is currently approaching the August low of $160.93, with the next support at the 78.6% Fibonacci retracement of the growth trend at $150.62. Resistance for bulls will be at $179 and $187. The RSI is approaching the low of 30.9, which provided a signal for a rebound last year. The MACD is also giving an oversold signal, with the ADX also showcasing oversupply.