The largest U.S. crypto exchange is set to report fourth-quarter results on Thursday. In recent months, it had scored an impressive Super Bowl ad, drummed up interest in its upcoming NFT marketplace, and avoided apotential hack of its new trading function. Yet its shares are trading at about 50% below November’s record high.
Coinbase has seen its stock price fluctuate in line with the broadercryptocurrencymarket. Because most of the company's revenue comes from unpredictable transaction fees, Coinbase's success today is largely dependent on what crypto prices do in any given period.
Here are three numbers investors should pay close attention to.
Monthly transacting users
As of Sept. 30, Coinbase counted 73 million verified users, of which 7.4 million were monthly transacting users (MTUs). These were retail users who used one or more products on the platform during the prior 28-day period. They are crucial to the company because they're Coinbase's most active customers. In Q3 2021, 82.8% of overall sales were derived from retail-transaction fees.
While MTUs dropped sequentially from Q2 to Q3, management mentioned that because October started off strong for the crypto market, Coinbase expects to have more MTUs in Q4, compared to Q3. When crypto prices are rising and volatility is elevated, users tend to trade more, benefiting Coinbase.
But as we saw, the crypto market tanked during the last couple of months in 2021. Falling prices could cause customers to close out their crypto positions, simultaneously discouraging new users from signing up. This situation doesn't bode well for Coinbase.
Therefore, I wouldn't be surprised if MTUs in the fourth quarter were lower than the 7.4 million registered in Q3.
Growth of subscription and services revenue
The most important factor that scares investors away from Coinbase, and probably why the stock currently trades for a cheap valuation of 19 times trailing-12-month earnings, is how much the business relies on transaction revenue. It accounted for 94% of total sales in the first nine months of 2021. Transaction revenue is very hard to predict quarter to quarter because it's correlated to crypto market prices and volatility.
Management is aware of this; that's why a huge focus right now is on increasing Coinbase's subscription and services revenue. Blockchain rewards and custodial fees make up the bulk of this segment. Initiatives like Coinbase Cloud, a tool for developers to build blockchain projects, and Coinbase NFT, a marketplace for non-fungible tokens, could help, as well.
Although just 11.8% of net revenue was derived from subscriptions and services in Q3, the segment grew 1,244% year over year, compared to a 295% increase in transaction revenue. If the same trend continued in Q4, it's a fantastic sign.
As cryptocurrencies shift from the investment phase to the utility phase, expect Coinbase's dependence on transaction revenue to fall, while its reliance on subscription and services revenue will rise. This is what shareholders should want, as it adds much needed stability and predictability to the business.
Analyst View
DA Davidson analyst Christopher Brendler lowered the firm's price target on Coinbase to $275 from $400 but keeps a Buy rating on the shares. The analyst states that while publicly available exchange data suggest that Coinbase had a much better-than-expected Q4, activity in Q1 has "slowed dramatically". Brendler adds that the recent underperformance in Coinbase reflects the broader tech correction, but his bullish views on bitcoin and potential upside from new products like NFTs suggest that the stock offers a "buying opportunity".
JPMorgan analyst Kenneth Worthington lowered the firm's price target on Coinbase to $345 from $447 and keeps an Overweight rating on the shares. The analyst marked his Coinbase model to the crypto market ahead of the company's Q4 earnings, accounting for higher crypto prices and better volumes than previously modeled. He also adjusted his 2022 estimates to account for what has been a bigger selloff in crypto than forecast so far in 2022.
Given crypto price softness year to date, company guidance for 1Q will be important.
The revenue of Coinbase in the fourth quarter of 2021 is expected to be $1.996 billion, the adjusted net profit is expected to be $576 million and the adjusted EPS is expected to be $2342 million, according to the average estimate of analysts surveyed by Bloomberg.
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