To The Moon

Back in May, I detailed how the first half of Q2 was not looking good for cryptocurrency platform Coinbase (NASDAQ:COIN). Between Bitcoin trading volumes falling as compared to Q1 levels as well as USDC's market cap sinking, it looked like the company would be missing revenue estimates for the period. Since then, key metrics in the crypto space have weakened even more, yet Coinbase shares have been one of the year's winners. At this point, investors need to get some major answers from the company.

Amazingly, investors have mostly shrugged off what could be very bad news for Coinbase. The U.S. Securities and Exchange Commission has filed a lawsuit against the company for operating as an unregistered securities broker. A number of US states are also looking at potential legal action against the company, although Coinbase intends to defend itself quite vigorously. The street will be waiting to hear from management at the Q2 report if the SEC news caused any meaningful amount of money to be pulled off the platform.

In the near term, it will be very interesting to see how Coinbase results fare. When the company reported its Q1 2023 results, Bitcoin volumes to date in Q2 were down about 24.5% sequentially. Coinbase generated approximately $110 million of transaction revenue in April as crypto asset volatility declined. In Q1, that segment of the business averaged about $125 million per month in revenue. For all of Q2, Bitcoin trading volume ended up down roughly 37.5% sequentially. Coinbase would have likely needed to pick up a significant amount of market share to overcome that potential revenue loss.

Subscription and services revenue guidance for Q2 was about $300 million, which would be down more than $60 million on a sequential basis. Coinbase management noted in its Q1 letter that the average USDC market cap in April was $31.7 billion, 23% lower than the Q1 average of $41.3 billion. USDC is a key driver of interest income, and as the chart below shows, the amount in circulation continues to hit new multi-month lows almost weekly.

USDC In Circulation (Circle)

Given what management guided to, and the continued declines in both USDC market cap (circulation amount) and Bitcoin volume since, one might think that Coinbase is on track to report a Q2 revenue print in the low to mid $600 million range. The company delivered net revenues of $736 million in Q1, but just since my previous article in May, the average Q2 estimate has come down from $686 million to about $640 million. I had been concerned for some time that a Q2 revenue miss was likely, but that chance keeps coming down as analysts further reduce their numbers. The company will report this Thursday, after the closing bell. The overall average is also being held up a bit by a high estimate of nearly $841 million that seems quite unrealistic at this point.

As shown above, USDC in circulation has weakened another billion dollars plus since the end of Q2. At the same time, Bitcoin trading volume in the first 30 days of the quarter is down another 27.56% over the first 30 days of Q2 according to Yahoo! Finance. At the moment, however, analysts are looking for a sequential rise in quarterly revenues to more than $671 million, which means the risk of guidance being weak is certainly there.

The recent surge in Coinbase shares also brings into question the overall valuation argument. The average price target on the street is currently a little under $77, implying about 22% downside from current levels. When I last covered the name, analysts saw tremendous upside in the stock, but shares have rallied significantly since. At the moment, I wouldn't be rushing to make a major move on Coinbase shares in either direction. I think that near term results won't be great if Bitcoin trading volumes and the USDC market cap continue to struggle. However, the potential for a Bitcoin ETF has certainly ignited some bullishness in the crypto space, and a continued surge in Bitcoin itself would likely send Coinbase shares higher in the near term.

One of this year's biggest winners has been Coinbase, which is up almost 194% so far in 2023. While shares have mostly tracked the price action of Bitcoin itself, trading volumes of the cryptocurrency have been weak and USDC's market cap has dropped significantly. At the same time, the company has been sued by the SEC regarding its business practices. This week's earnings report should provide some major insight into these key items, which will determine if the surge in shares can hold.

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Intel had a flawless quarter with beats on revenue, gross margin, EPS and guidance. Intel also seems to have had a flawless quarter in terms of roadmap execution, further reinforcing and de-risking the underlying turnaround effort. However, investors obviously shouldn't be oblivious to the fact that this quarter's outperformance comes after basically four straight quarters of underperformance (whether due to misses or lowering guidance in advance) during this downturn.

Clearly, in the early days (given for example management's initial optimism of a quick recovery) few would have expected revenue to be this far down at this point. Put differently, revenue was still down double digits YoY, and despite the return to profitability free cash flow breakeven is only expected by the end of the year.

While a stock pop might be warranted after beating estimates, the stock is already up quite significantly from its lowest point. So given that the recovery in financial performance is only happening gradually, this raises the question of how much further upside there could realistically be in the near-term.

In that regard, the first part of my thesis from a few quarters ago (that Intel's stock had declined too much since a meaningful part of the financial performance was due to the inventory correction, which resulted in CPU sales well below sell-through rate, exacerbating the downturn) seems to have played out nicely. In contrast, some daring predictions by others such as that the stock would go to $20, $15 or so have not.

This still leaves a second part of the thesis, which is a full recovery in financials. However, this might take quite a bit longer given (1) the low likelihood of full recovery to a COVID-era PC TAM, (2) the data center market share erosion in the last few years, and (3) the many exited businesses. Nevertheless, there is also still a third part underway that should start to play a role going into 2024 and beyond, which is the actual technological turnaround itself.

So while the stock has recovered some of its losses, overall I would say that in the mid- to long-term outlook there are still more tailwinds than headwinds (most of which by now are already in the rearview mirror), which provides and still leaves the stock with a favorable investment opportunity.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. $Coinbase Global, Inc.(COIN)$

SOURCE: SEEKINGALPHA