Coinbase has been crashed – Is it time to buy?

If you follow the large US-based cryptocurrency exchange Coinbase (PIECE OF MONEY -1.88%), you probably know that the stock was crushed this year. Since its IPO just over a year ago, Coinbase shares have fallen more than 80%. The significant drop made the stock look cheap, now trading at less than seven times earnings.

Let’s take a look at why Coinbase’s stock is down so much and whether or not it’s a buy.

The cryptographic connection

Coinbase derives the bulk of its revenue from transaction fees on crypto trades, and most of its trades come from retail investors, so naturally, there is a strong correlation between crypto trade volume and Coinbase revenue. In the first quarter of 2022, crypto trading volume plummeted as the crypto winter set in and the price of cryptocurrencies fell significantly. The largest currency in the world, Bitcoinis currently trading below $30,000.

Image source: Coinbase.

As a result, Coinbase recorded $1.16 billion in revenue in the quarter, down 27% year-over-year and 53% from the sequential quarter. Retail transaction revenue of approximately $966 million is down nearly 34% year-over-year. While co-founder and CEO Brian Armstrong called the tough market conditions an “elephant in the room,” he also tried to put a positive spin on the current environment.

Although crypto trading volumes in the macro environment were down 44%, we were also down around 44%. But in the assets we support, including majors like Bitcoin and Ethereum, we actually gained shares. Much has been said in the past about fee compression. But, we have seen in recent quarters that this has not been the case. In fact, our participation rate has been up slightly in recent quarters. And there are a lot of new revenue streams emerging like staking and our subscriptions and services, which grew 169% year-over-year.

The market is likely worried about the appetite for crypto in the near term, with the Federal Reserve aggressively raising interest rates, making safer assets like US Treasuries more productive. The Fed is also beginning to unwind its nearly $9 trillion balance sheet, essentially removing cash from the economy. All of this creates a difficult environment for riskier assets, including anything crypto-related.

Person looking at multiple computer screens.

Image source: Getty Images.

Is it a purchase?

Obviously, being so heavily connected to the crypto market and crypto trading volume makes Coinbase somewhat hostage to the price of Bitcoin. It’s great when crypto is roaring and not so great during crypto winters. I wish Coinbase was less correlated to this type of volatility, because the market rarely rewards companies whose earnings are volatile and hard to predict.

Coinbase began to diversify revenue by growing subscription and service revenue, which at $152 million in Q1 was the company’s highest second quarter in this segment and up significantly year over year. the other. Coinbase also recently rolled out a marketplace for non-fungible tokens, and Armstrong said 54% of active users do something on the Coinbase platform other than just trading crypto.

There is likely more volatility ahead for Bitcoin – and therefore more volatility for Coinbase – so investors should be prepared to see Bitcoin drop much more. But Coinbase has built a strong brand, now has a very reasonable valuation, and also holds about $6.1 billion in cash on its balance sheet, which equates to about a third of its total assets. If you believe like me that crypto is here for the long haul, then I think Coinbase is a good long-term buy at these levels, but expect a bumpy ride.

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