Coinbase Q2, Earning's Not Major Issue

Despite the overall volatility in the cryptocurrency market during Q2, $Coinbase Global, Inc.(COIN)$ reported better Q2 earnings results , crypto market fluctuations and regulatory uncertainties wasn't as significant as anticipated. The company's overall performance, including both losses and revenue, outperformed expectations.

Q2 Review

Trading volume declined from $145 billion in Q1 to $92 billion, also lower than last year's Q2 volume of $217 billion.

Revenue reached $708 million, surpassing the market's expected $638 million, though it decreased by 12% compared to the previous quarter's $736 million.

Trading revenue dropped from $374.7 million in the previous quarter to $327.1 million but still fared better than the expected $285 million. This decline was due to reduced trading volume, partially offsetting higher realized fees. Subscription and service revenue amounted to $335 million, slightly lower than Q1's $362 million but higher than the expected $320 million. Moreover, the company managed to increase its market share.

Furthermore, the total operating expenses were $773 million, lower than the previous quarter's $896.4 million and last year's $1.85 billion.

Adjusted EBITDA totaled $194 million, surpassing the market's expected $61 million but lower than Q1's $284 million and higher than last year's -$151 million.

Regarding guidance, the company expects Q3 subscription and service revenue to be at least $300 million, compared to the Visible Alpha consensus of $325.5 million and Q2's $335.4 million. On the cost side, management expenses are projected to be between $575 million and $625 million (including around $210 million in stock compensation) for Q3, down from $579.7 million in Q2.

Investment highlights

the company's performance has shown a reduced correlation with cryptocurrency prices. While Bitcoin trading volume declined and the market value of USDC dropped in Q2, regulatory pressures eased, and Coinbase gained credibility by being chosen as a custodian for several Bitcoin ETF applications, increasing trust among institutions. The launch of more ETFs could lead to broader mainstream acceptance of cryptocurrencies.

The company is facing weak trading pressures while trying to expand institutional and utility-based subscription and service revenue. Cryptocurrency prices no longer have the same impact on trading revenue as before due to stable overall trading volume. Additionally, the company is seeking more institutional clients, staking, and international expansion to establish sustainable cost, liquidity, and revenue stability. The proportion of interest income has also grown, and Q2 demonstrated increased free cash flow through prudent operations.

However, the primary concern for Coinbase investors currently lies in its legal challenges. While some investors previously disregarded concerns, the lawsuit filed by the SEC alleging unauthorized operation as an unregistered securities broker is likely to have a more substantial impact. Different states are also considering potential legal actions against the company, but Coinbase intends to vigorously defend itself.

The company's valuation is not the most significant factor right now; the real challenge lies in navigating the regulatory landscape. Last month, Ripple won its lawsuit against the SEC, with the court ruling that XRP is not a security, resulting in Coinbase relisting XRP for trading. Institutions view this as a positive sign for the crypto industry. The ongoing Grayscale lawsuit against the SEC is also likely to be successful, leading to the transformation of GBTC into a BTC spot ETF.

Investors who lack confidence in a potential settlement are more likely to adopt a bearish stance on the company, while those who believe regulatory issues will eventually be resolved are more likely to be bullish on Coinbase.