Coinbase (COIN 4.30%), a cryptocurrency exchange platform founded nearly nine years ago, went public via a direct listing on April 14. The stock opened at $381 per share, well above its reference price of $250, and closed at $328 on the first day, which valued the company at nearly $86 billion.
However, the stock subsequently fell to the low $290s as bitcoin's (BTC -0.08%) price tumbled. Its current market cap of $58 billion still values the company at 45 times last year's sales, which makes it pricier than many other fintech stocks.
Should investors take a chance on Coinbase, or should they stick with Square (SQ 3.97%), a more diversified fintech player that also lets its users buy and sell bitcoin?
Coinbase is an all-in bet on cryptocurrencies
Coinbase is the largest cryptocurrency exchange in the U.S. by trading volume. Its median trading volume rose 24% to $21 billion in 2019, then surged another 81% to $38 billion in 2020.
Its platforms allow mainstream users, professional traders, and institutional investors to buy and trade a wide range of cryptocurrencies. It also provides an online wallet for storing cryptocurrencies, a Visa debit card for crypto transactions, crypto-processing services for merchants, and a digital stablecoin pegged to the U.S. dollar.
Coinbase generates most of its revenue from transaction fees. Its total revenue rose 144% to $1.3 billion in 2020. It generated a net profit of $322.3 million, compared to a net loss of $30.4 million in 2019, while its adjusted EBITDA surged nearly 22 times to $527.4 million.
If those prices keep rising, Coinbase might represent a balanced investment on the broader cryptocurrency market. But if those prices decline, Coinbase will face a brutal slowdown. Competition from other crypto trading apps -- including Square's Cash App, PayPal's (PYPL 2.23%) Venmo, and Robinhood -- could also impact its ability to raise fees.
Square is a more balanced play on digital payments
Square's core platform processes mobile, online, and point of sale (POS) payments for merchants. It also sells POS systems that tether businesses to its cloud-based seller services, which include tools for managing online orders, payroll, analytics, and more.
For consumers, Square offers the Cash App, a peer-to-peer payments app that also offers bitcoin purchases and free stock trades. The Cash App serves more than 36 million monthly active users, many of whom use its linked Visa-branded Cash Card for debit card purchases.
Square's revenue surged 101% to $9.5 billion in 2020, even as business closures throughout the pandemic throttled the growth of its seller-facing businesses. But soaring sales of bitcoin on the Cash App, which increased roughly nine times year-over-year to $4.6 billion, offset that slowdown.
Square only generated a 2% gross profit on its Bitcoin sales, so its adjusted earnings rose just 5% for the year as its lower-margin bitcoin revenue squeezed its margins. Its adjusted EBITDA grew 14% to $474 million.
Square's margins should expand again this year as more businesses reopen and reduce its dependence on bitcoin purchases. However, Square still faces rising competition in the online payments space from PayPal and Europe's Adyen, while PayPal's recent addition of cryptocurrency purchases to Venmo could help it catch up to Cash.
It's a simple choice
Coinbase is a diversified way to invest in the cryptocurrency market, but it's too speculative for my taste. Wall Street thinks Coinbase's revenue could quadruple this year if cryptocurrency prices continue to rise -- but I believe crafting long-term forecasts for cryptocurrencies is a futile effort.
I'd rather stick with Square, which provides some exposure to the cryptocurrency market but generates most of its profits from seller-based services. Analysts still expect Square's revenue and earnings to both rise nearly 50% this year.
Square's stock isn't cheap at 129 times forward earnings and eight times this year's sales, but it's a much safer and more balanced way to profit from the expansion of the fintech market than Coinbase.