The beauty of the stock market, which is the best tool people have to generate wealth, is that investors have the opportunity to buy shares in thousands of companies at any time. With that being said, a tiny fraction of businesses are certainly better than most others, and these can provide the possibility for market-crushing returns over time. Focusing on these select few stocks is a winning strategy.
Luckily for you, I've identified one specific company that deserves your attention. If I could buy only one stock, here's why it would be Coinbase (COIN -7.68%).
Coinbase is building the crypto economy
Many investors know of Coinbase as a popular crypto brokerage and exchange. The company first started with the goal of making it easy to buy and sell Bitcoin. However, its reliance on the world's most valuable cryptocurrency has diminished in recent quarters. During Q4 2021, Bitcoin accounted for just 16% of total trading volume.
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Coinbase now offers an incredible 139 assets for trading and 172 for custody, showcasing its diverse token offerings for both retail and institutional customers. But the company still depends heavily on trading. In 2021, 92% of revenue came from transaction fees, a factor that most likely contributes to the stock's cheap price-to-earnings (P/E) ratio of 13.
The management team, led by founder Brian Armstrong, is fully aware that a business whose financial success is dependent on volatile, unpredictable quarter-to-quarter trading volume probably won't please investors over the long term. And that's why Coinbase is really focusing on growing its subscription and services offerings.
This segment, which includes revenue primarily from blockchain rewards and custodial fees, represented 8.6% of the overall business in Q4 2021, up from 4.2% in the prior-year period. Initiatives like Coinbase Cloud, a tool for developers to build blockchain projects on Coinbase's infrastructure, and the soon-to-be-released Coinbase NFT, a marketplace to mint and trade non-fungible tokens, will provide a boost to subscription and services sales going forward.
As the crypto economy transitions from the investment phase to the utility phase, Coinbase will be at the forefront of this shift. It is already insanely profitable right now, a remarkable characteristic given that it's still in hypergrowth mode. In 2022, the business generated $3.6 billion in net income on $7.4 billion of net revenue, for an outstanding profit margin of nearly 50%. You'd struggle to find many businesses out there that have this kind of financial profile.
Coinbase stock has massive upside
As of Dec. 31, the total amount of assets on Coinbase's platform was $278 billion, which represented 11.5% of the global cryptocurrency market at year-end. The company's market share has steadily crept up in recent years, so it's not hard to comprehend that as digital assets continue growing in value over the next decade, Coinbase should benefit tremendously as it becomes the crypto platform of choice.
An investment in Coinbase stock is effectively a bet on the growth of the crypto industry. While cryptocurrencies are still in the early stages of development, a fact that leaves a lot of uncertainty as to the future, there are signs that this new technology is here to stay.
First, talent is moving to the crypto space. Executives from Alphabet, Apple, and Meta Platforms are leaving top jobs to join crypto firms. Coinbase also tripled its head count in 2021 and now has 3,730 full-time employees.
Second, thanks to the popularity of Ethereum's programmable blockchain, use cases (besides just speculation) are increasing. Decentralized finance and non-fungible tokens are two prime examples today.
Lastly, while the regulatory framework is still largely uncertain throughout the world, it's becoming clearer that the U.S. has no intentions to ban cryptocurrencies. The goal is to create an environment that fosters innovation but also keeps consumers safe. For what it's worth, Coinbase has always operated with a regulator-first approach, which could prove to be a major competitive advantage as newer rivals emerge.
That being said, as the entire cryptocurrency market grows, Coinbase will as well. And this results in massive upside for shareholders today. If you can accept the uncertainty, and oftentimes gut-wrenching volatility, that comes with digital assets (Coinbase in particular), and you adopt a long-term time horizon (at least five years), then I think this makes for a smart investment today.
