Cryptocurrency seems to be here to stay in one form or another. As the industry sorts itself out I have finally made an investment in one company that I think could be a winner long term. Coinbase (COIN 3.71%) has established itself as a leader in crypto trading and education, and is a brand that could be a household name, eventually.
This investment isn't without risks. Cryptocurrencies could crash, trading margins will likely come down, and a flood of money coming into crypto could reverse at some point. But I like the risk/reward profile of this cryptocurrency leader.
Image source: Coinbase.
Coinbase's financials are too good to ignore
Coinbase's financials are simply incredible. In the second quarter of 2021, the company reported $2.03 billion in revenue and net income of $1.61 billion. On an annualized basis, that's $6.4 billion in net income, which gives the stock a price-to-earnings ratio of 11, based on that annualized income level. If earnings grow, the value would be even better.
That's an incredible value for a non-growth stock, but for a company growing like Coinbase, it's a great value. Earnings may rise or fall as cryptocurrency and NFTs mature, but I think shares are showing value, and the money the company is earning could be invested in future innovations and growth opportunities.
COIN Revenue (Quarterly) data by YCharts.
NFTs have a bright future
OpenSea is currently the leading marketplace for non-fungible tokens (NFTs), with over $3 billion in transaction volume in August and September. Volume slipped to $2.6 billion in October, according to Dune Analytics, but that's still a huge business with very little competition -- until Coinbase launches its NFT marketplace, which is expected later this year.
For now, NFTs are primarily images that are bought and sold, not too dissimilar to art. But they have the potential to be used for real utilities like verifying ownership of real-world objects or granting access to content. And the smart contracts that can be built into NFTs allow creators to set the rules of each one.
I think we're just starting to unlock the NFT market as creators and businesses start to think about how they'll use NFTs to generate real value. As a leading cryptocurrency marketplace, Coinbase could be a natural place to go to find and trade NFTs.
Coinbase doesn't come without risks
As bullish as I am on Coinbase's business, it certainly comes with risks. The company makes most of its money on cryptocurrency transactions, and as fees come down, it may make less money on each transaction. We could also see transactions drop if crypto values plunge. The same could happen in NFTs, which could crash in value.
What I think reduces the risk long term is the incredible amount of cash that Coinbase is generating today. That money can be used to build innovative products in the future and is also backing start-ups through Coinbase Ventures.
This may be a volatile stock for investors over the next few years, but I think it's well positioned to be a big player in the cryptocurrency/NFT/metaverse future. That's why I recently bought shares and may add more over the next few months.
