After going public in April 2021, Coinbase (COIN -2.31%) has been on a roller coaster ride. The stock immediately lost 30% of its value in less than two months. Then, after surging 46% over the next five months from June to November, Coinbase has crashed 32% since. Such is the volatile nature of a business tackling a huge opportunity within the nascent crypto industry.
It's difficult to ignore fluctuations in the stock price, but long-term investors should focus on a single metric for this business. Here's why Coinbase's most important number is 1 billion.
Image source: Coinbase.
It's all about user growth
Brian Armstrong, Coinbase's founder and chief executive officer, has set the goal "to get 1 billion people accessing the crypto economy through [our] products every day." The company counted 73 million users as of Sept. 30, so this is an incredibly audacious objective. To put things in perspective, it is estimated that there are roughly 250 million crypto users worldwide today. With higher internet and smartphone penetration, this target is certainly a possibility, albeit one that could take many years or even decades to achieve.
Coinbase will make progress toward its goal by focusing on four key areas. First, it's investing in product offerings, like its main retail trading app, Coinbase Prime for institutions, Coinbase Cloud for developers, and new initiatives like the non-fungible token (NFT) marketplace. Second, improving customer service is vital. Third, investing in site reliability to handle higher volumes is necessary for growth. Lastly, continuing to take a regulator-first approach will help facilitate greater crypto adoption.
Most users, whether an institution or an individual, interact with crypto for the first time by buying a coin like Bitcoin or Ethereum. Coinbase's overarching objective is to be the go-to platform for all digital assets. This could mean trading NFTs or interacting with decentralized finance applications. The first goal is bringing more people into the crypto economy by becoming Coinbase users. Having them engage more with the products and services follows.
Based on Coinbase's user base of 73 million and revenue in the most recent quarter of $1.2 billion, the company's average revenue per user (ARPU) was more than $16 in the three-month period. At 1 billion users and the same ARPU, Coinbase would generate $16.4 billion in quarterly sales. The business has already proven its superb profitability, with a 31% net income margin in the third quarter of 2021. At that level, I'm certain the stock could be multiples of its current price.
But the path to 1 billion users won't be smooth.
Shareholders must accept volatility
Coinbase's management team urges shareholders to view an investment in the company not on a quarter-to-quarter basis but with a focus on the very long term. Over the past 12 months, 85% of total revenue came from transaction fees generated from user trading. Because trading is driven by cryptocurrency prices and market volatility, revenue is almost impossible to predict. The stock's performance reflects this.
The management team is well-aware of this situation, and they have positioned Coinbase to be able to handle the ups and downs. Subscription and services revenue has slowly increased as an overall share of the business, from 3.8% in Q3 2020 to 11.8% in the latest quarter. This segment includes things like blockchain rewards and custodial fees. As crypto moves from the speculation and investment phase to the utility phase, this recurring and more predictable revenue stream should grow in importance and have more impact on the direction of the company.
Additionally, Coinbase is in a strong financial position to withstand whatever comes its way. As of Sept. 30, the company had $6.4 billion in cash and cash equivalents on its balance sheet. This is enough to meet working capital and capital expenditure needs over the next 12 months. We can't forget that Coinbase has been profitable in each of the last six quarters, a feat that most newly public enterprises don't achieve for some time.
I firmly believe that Coinbase will continue to benefit as crypto becomes more mainstream, something that won't happen overnight. In fact, the business will likely play a big role in this actually happening. The march to 1 billion users is on.
