For cryptocurrency, 2021 has been a very exciting year. For Coinbase, the most well-known and publicly traded cryptocurrency company, it was average. Strangely, Coinbase seemed unable to capitalize on the very financial market foam it was designed for.
Why is this important: There’s an old investor adage: In a gold rush, the shovel seller gets rich even if there’s no gold. Coinbase should be a shovel company, but somehow it hasn’t been.
- Driving the news: As of Thursday afternoon, Coinbase (COIN) was trading at $58.50, down 83% from its first day of trading in April 2021.
- To note : COIN price rallied along with the rest of the crypto market as Bitcoin hit an all-time high. COIN reached $343 on November 7, just before Bitcoin reached $69,044.77 on November 10.
What they say : “It underperformed against cryptocurrency markets,” Morningstar Coinbase analyst Michael Miller told Axios. “I think a lot of it comes down to expense.”
- The company has dramatically increased its large-scale spending, Miller explained. “They’ve gone up about 70% in the last 6 months.”
- Revenues aren’t down much, he noted.
- Coinbase encountered many scaling issues. Longtime crypto dwellers know he has a bad reputation for customer service, despite trying to catch up, and Miller said that’s where some of the current spending is going.
Yes, but: Coinbase would argue that these expenses were an intentional choice. On a call with investors after the earnings release, Alesia Haas, Chief Financial Officer, said: “We are choosing to make 2022 a year of investing. And that’s because we believe investing now is key to our future as a multi-product platform serving a diverse customer base.”
By the numbers: Despite his criticisms, Miller currently puts the fair value of Coinbase stock at $131, well above the market price.
- Coinbase posted revenue of $1.17 billion and a net loss of $430 million for the first quarter of 2022.
- “You’ve seen the market really move away from giving the benefit of the doubt to low earnings or many multiple companies,” Miller said.
Coinbase is also expensive utilize. Miller said the cost of transactions on Coinbase averaged about 1.3% of trade value, Miller estimated. For comparison, FTX charges 0.10% between the two parties in a given trade.
- “The overriding long-term risk for Coinbase is fee compression,” Miller said, but he also says that’s not the issue now. Users come to Coinbase, perhaps because of name recognition. It’s just spending a lot of money.
Conclusion : The crypto market is looking bad right now, and that is going to put a damper on trading. Miller said, “They’ve positioned themselves for good times, but it looks like we’re going through some bad times right now.”