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Coinbase (NASDAQ: COIN) Stock Below Listing Price: Is This a Buying Opportunity?

profileSudhan P

Coinbase Global Inc (NASDAQ: COIN) stock has not been performing well of late.

Two months into its public life, Coinbase’s shares have fallen 11% to US$222.60, down from the reference price of US$250.

The company’s stock rose as high as US$381 a share on debut day, increasing 52% from the reference price.

Coinbase went public through a direct listing (where no new shares were issued nor sold), unlike the more common initial public offering (IPO) route.

Source: Google Finance

Now that the Coinbase stock is under the water, is this a buying opportunity for long-term investors?

Let’s explore!


TL;DR: Should You Buy Coinbase Stock?

  • Coinbase is a cryptocurrency exchange that allows people and companies to buy and sell various digital assets.
  • The company has grown revenue and net profit strongly of late due to the increasing popularity of cryptocurrencies.
  • Coinbase’s 2021 first-quarter net income grew a whopping 2,000% year-on-year
  • One main risk to note for Coinbase is that most of its revenue comes from Bitcoin and Ethereum transactions.
  • At a share price of US$222.60, Coinbase is trading at around 15 times its forward earnings, and it could prove to be a steal for investors who believe in digital currencies over the long run.

Coinbase Business Overview

Coinbase is a cryptocurrency exchange that allows people and companies to buy and sell various digital assets such as Bitcoin and Ether.

In fact, even after Coinbase’s steep fall in share price, it’s still one of the world’s largest listed exchanges by its own market capitalisation.

Coinbase supports the crypto economy with over 90 crypto assets for trading or custody. As of 31 December 2020, the total value of the assets represented around 11% of crypto assets’ total market cap.

Source: Coinbase Form S-1

Coinbase makes most of its money via transaction fees, which is earned based on the price and quantity of the crypto asset bought, sold, or withdrawn.

The higher the trading volume, the higher the transaction revenue that the company makes.

Coinbase’s Financial Performance

For the year ended 31 December 2020, Coinbase’s total revenue surged 139% year-on-year to US$1.3 billion while its net profit was US$322 million, compared to a net loss of US$30 million in the previous year.

For Coinbase’s first quarter ended 31 March 2021, total revenue ballooned close to 10x to US$1.8 billion, up from US$190.6 million exactly a year ago. With that, net income grew 2,313% year-on-year to US$771.5 million.

Coinbase’s strong 2021 first-quarter results came on the back of crypto assets reaching all-time high prices and elevated levels of volatility. For instance, by the end of the first quarter this year, Bitcoin’s price had doubled to almost US$59,000 compared to the end of 2020.

Source: coindesk

The euphoric crypto market environment drove strong engagement on Coinbase’s platform, with its trading volume increasing from US$30 billion in the 2020 first-quarter to US$335 billion in the latest quarter.

Risks With Coinbase

The first risk for Coinbase is to do with concentration.

The majority of Coinbase’s trading volume, and hence revenue, comes from Bitcoin and Ethereum transactions.

For example, in the first quarter of 2021, out of the US$335 billion in trading volume, Bitcoin took up 39% of the pie, with Ethereum clocking 21% and the other crypto assets taking up the remaining 40%.

Source: Coinbase 1Q2021 shareholder letter

Next, there has been increasing scrutiny surrounding cryptocurrencies.

The latest salvo on the crypto market comes from China. The country’s central bank said it was cracking down on digital assets bought and sold through China’s banks and payment processing companies. An estimated 75% of the world’s Bitcoin is mined in the country.

With the crackdown, over 90% of China’s Bitcoin mining capacity, or one-third of the global crypto network’s processing power, will be shuttered.

The continuing tussle between regulators and proponents of cryptocurrency doesn’t bode well for digital asset exchanges like Coinbase.

There’s also competition risk with many exchanges available for traders to trade crypto. A quick check on CoinMarketCap shows that there are over 300 cryptocurrency spot exchanges.

Other than its primary brokerage business, Coinbase has a footing in the e-payments industry as well through its Coinbase Commerce platform, which allows merchants to accept cryptocurrency on their websites.

However, this part of its business faces competition too from the likes of PayPal (NASDAQ: PYPL). In March, PayPal launched “Checkout with Crypto”, allowing US customers to pay items with crypto seamlessly within PayPal at checkout.

PayPal has a wider reach and higher acceptance level than Coinbase so that’s something Coinbase has to grapple with.

Final Thoughts

It’s not surprising to see Coinbase’s stock price fall amid the negative sentiments surrounding the crypto market currently.

Trading volumes, and hence revenue for Coinbase will slow if interest in crypto starts to wane. With a trading fee of over 1% per trade, transacting via Coinbase is not exactly cheap either, so there’s certainly work to be done for Coinbase.

Having said that, Coinbase could offer investors an interesting backdoor opportunity into the crypto world, without owning any cryptocurrency outright.

Annualising Coinbase’s 2021 first-quarter net income of US$771.5 million, we would get US$3.1 billion in earnings. At a market capitalisation of US$46.5 billion, it translates to just 15 times forward earnings.

While the company may look undervalued compared to the stock market in general, investors should look at its risk/reward potential to decide if it makes sense to invest in it.

Would You Buy Coinbase Stock? 

You can participate in the lively discussion regarding stocks, including Coinbase at Seedly!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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