The capital markets ended 2021 with precipitous sell-offs in high-growth technology stocks. The sell-offs were primarily driven by slowing growth in stay-at-home stocks, investor concerns over inflation, and tax harvesting.
Traditional equities are not the only assets experiencing valuation and price compression. Bitcoin (BTC 1.00%) and Ethereum (ETH -0.33%) are both down over 30% since reaching peaks in November 2021. Following its initial public offering in April 2021, Coinbase Global (COIN 3.58%) benefited from market euphoria and the rising popularity of cryptocurrencies in particular. This was short-lived, and the stock has been on a downward spiral, falling over 20% since December 2021. Let's dig in and see if now is an opportune time to buy Coinbase on the dip.
The cryptocurrency sector is crashing
Despite the economic and social hardships from the pandemic, meme stocks and cryptocurrency scams have flooded the markets and helped fuel a hyperbolic, unsustainable rise in valuations. This false sense of euphoria seems to be finally bringing a reality check. The final months of 2021 experienced significant sell-offs in high-flying technology stocks in particular. These sell-offs have now mutated beyond stocks, and cryptocurrencies are the next asset to experience valuation compression.
After reaching all-time highs in November 2021, Bitcoin and Ethereum began the new year in a downward spiral. In the first week of January, Bitcoin experienced its longest continuous price decline since 2018. Moreover, leading cryptocurrencies Ethereum and Solana have also fallen near 20% since the beginning of the year.
The financial results for companies such as Coinbase are closely correlated to the prices of cryptocurrencies. For this reason, its business could fluctuate significantly throughout the year, driven by the volatility associated with cryptocurrencies. Unlike a company with highly predictable recurring revenue, Coinbase relies on transaction fees from trading.
Don't miss the forest for the trees
Investors should keep in mind that Coinbase is growing exponentially, despite the turbulent market conditions. T Coinbase generated revenue growth of more than 300% year over year in the third quarter, from $287 million in Q3 2020 to $1.2 billion in Q3 2021. Moreover, the company is operating at a high level of capital efficiency, reporting a 54% net profit margin through the first nine months of 2021, compared to 21% for the same period in 2020.
Several Wall Street titans have recently expressed their thoughts about the sell-off in crypto. ARK Invest founder Cathie Wood suggested that uncertainty in the broader macroeconomic environment has investors resorting to cash as a safety net. As the value of the dollar increases, it pushes down the value of other assets such as stocks and crypto. Cryptocurrency is now experiencing its own version of the valuation compression that high-growth technology stocks experienced during the final months of 2021.
Wood referred to the correction in technology stocks and cryptocurrency markets as "deep value territory," signaling that she is optimistic about these innovative companies and applications in the long run. Moreover, Goldman Sachs analyst Zach Pandl recently published a client note forecasting that Bitcoin could reach a long-term price target of $100,000 should it continue taking market share away from other hedge assets such as gold.
It is important to understand that cryptocurrencies can be an intimidating asset class due to the overwhelming number of tokens to choose from and their myriad uses. The underlying volatility of cryptocurrencies may also drive negative investor sentiment, leaving many to think that it's too late to get involved. But Wall Street's long-term positive sentiment on cryptocurrencies could bode well for Coinbase and investors.
The rise of NFTs
The introduction of non-fungible tokens (NFTs) has opened up a new world beyond traditional cryptocurrency tokens. An NFT is a type of digital asset that can be used to authenticate ownership of digital assets like artwork, recordings, virtual real estate, or virtual pets.
OpenSea, a privately held NFT marketplace, benefited from the rising enthusiasm around the cryptocurrency space during 2021. The company and its investors are confident that this enthusiasm is here to stay, as it recently announced that it raised $300 million in Series C financing and is now valued at $13.3 billion. For reference, as of the time of this writing, OpenSea's valuation represents roughly 20% of Coinbase's market capitalization.
In December 2021, OpenSea processed more than $2.4 billion in transaction volume, and generated hundreds of millions in fees last year. This growth in NFTs has not gone unnoticed by Coinbase. In October 2021, the company reported that it was planning to launch its own NFT marketplace in 2022. Bank of America recently upgraded Coinbase stock from neutral to buy, citing revenue diversification beyond traditional retail cryptocurrency trading as a catalyst.
Coinbase's revenue has increased far more dramatically than its costs over the last 12 months. For this reason, the company has reached a level of financial flexibility allowing it to invest in new product development that could unlock diverse revenue streams. As Coinbase looks to evolve beyond a cryptocurrency trading platform, the stock is hovering near an all-time-low valuation of 9 times its trailing-12-month sales.
Although 2022 has started with a compressed valuation in technology stocks and cryptocurrencies, the long-term positive sentiment from Wall Street and the recent decline in cryptocurrency prices at large make Coinbase a compelling long-term investment. As the company trades near all-time lows, now may be an attractive entry point for investors looking for exposure to the cryptocurrency market.