Please ensure Javascript is enabled for purposes of website accessibility

Forget Coinbase, Buy this Growth Stock Instead

By Neil Rozenbaum - Apr 16, 2021 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Square exposes you to crypto but with less risk.

In today's video, I'm going to raise a couple of points as to why Square (SQ 4.43%) is a better buy than Coinbase (COIN 12.99%), which is going public this week through a direct listing. You can expect a pretty high valuation, especially since we're in a crypto bull market. Investment bank D.A. Davidson says valuation could reach $90 billion. We're also going to have a look at Coinbase's first-quarter estimated earnings (pretty impressive).

Q1 2021 estimated results

  • Verified users of 56 million
  • $1.8 billion in total revenue, a 207% increase from the fourth quarter of 2020
  • Net income of approximately $730 million to $800 million
  • Adjusted EBITDA of approximately $1.1 billion

How does Coinbase make money?

When you buy, sell, and send on Coinbase, it takes a fee (flat or a percent of the value). Taken from its S-1 filing:

We generate substantially all of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets by our customers. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction.

The bigger picture

Right now, you can only trade Bitcoin on Square's Cash App and we know how much it makes from it -- a lot. What is stopping the likes of Cash App from adding more crypto? What is stopping other platforms (such as SoFi and PayPal's Venmo) from copying Coinbase? Nothing.

Yes, Coinbase has a reputation that's true, and it's probably the NASDAQ of crypto. But that's about it in my opinion.

Second, wouldn't you be better off owning the crypto rather than the company holding the crypto?

Bull vs. bear market

During a bull market, Coinbase will make more money than during a bear one.

Taken from the S-1 filing:

Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected. We generate substantially all of our total revenue from transaction fees on our platform in connection with the purchase, sale, and trading of crypto assets by our customers. Transaction revenue is based on transaction fees that are either a flat fee or a percentage of the value of each transaction. 

So, in short, the higher the price of Bitcoin, the higher the fee. During a bear market, crypto prices go down and so will the revenue from those fees. During a bear market, people are less likely to buy crypto because -- let's face it -- the FOMO is real when things go up, not when they come down.

Conclusion

Coinbase will play a significant role for crypto in the years to come, but I believe Square is a better buy at the moment because of the points mentioned above. Square holds Bitcoin on its balance sheet, so you get exposed to that; you get exposed to the Bitcoin trading on Cash App as well, and hopefully, in the future, it will add more assets such as Ethereum and Ripple. And ultimately, you get exposed to everything else Square does.

Neither company is cheap and that's fine if you're a long-term investor. But there are too many uncertainties regarding crypto to pay this high of a premium for Coinbase at the moment.

*Stock prices used were the closing prices of April 9, 2021. The video was published on April 13, 2021.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$66.73 (4.43%) $2.83
Nasdaq, Inc. Stock Quote
Nasdaq, Inc.
NDAQ
$157.49 (1.22%) $1.90
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$74.40 (4.20%) $3.00
Social Capital Hedosophia Holdings Corp. V Stock Quote
Social Capital Hedosophia Holdings Corp. V
IPOE
Bitcoin Stock Quote
Bitcoin
BTC
$19,884.81 (-2.12%) $-429.80
Ethereum Stock Quote
Ethereum
ETH
$1,120.57 (-2.84%) $-32.79
Ripple Stock Quote
Ripple
XRP
$0.32 (-1.85%) $0.01
Coinbase Global, Inc. Stock Quote
Coinbase Global, Inc.
COIN
$55.41 (12.99%) $6.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.