The Federal Reserve's intention to hike interest rates throughout 2022 in an effort to curb soaring inflation has undoubtedly sparked fears of a looming recession. And this sentiment has caused a sell-off in risky assets, including cryptocurrencies.
A weak market for cryptocurrencies translated to lower trading volume and a revenue decline of 27% for crypto exchange operator Coinbase (COIN +5.66%) in the first quarter. Consequently, the stock has been getting hammered, down 79% so far this year as of this writing.
But amid all of the negativity, it's best to remain optimistic. Here's why Coinbase's stock looks like an absolute steal right now.
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Coinbase is building the crypto economy
The first decade of Coinbase's life has been dominated by cryptocurrencies being viewed mainly as a tool for investment. Offering a seamless and easy-to-use platform for both individuals and institutions to trade and hold custody of 166 and 212 different digital assets, respectively, Coinbase has amassed 98 million verified users. In the most recent quarter, transaction fees accounted for 87% of the company's revenue, showing that trading is still incredibly important.
Besides crypto being used for investment, management wants to build crypto's utility as a financial system and develop an app platform. This means making it easier for customers to stake their holdings and earn rewards, as well as introducing new features like Coinbase NFT and the Coinbase Wallet. Think of your banking provider and the Apple App Store combined into one, but with Coinbase being the primary account and all the applications being crypto-native.
Coinbase posted a net loss of $430 million in the first quarter versus net income of $840 million in the fourth quarter of 2021. Because the company is in growth mode and aggressively investing in building out its suite of products and services, especially in an industry that's evolving as quickly as cryptocurrencies, the huge fluctuations in quarterly results are to be expected.
And the stock, which has been extremely volatile, tracks what happens with broader crypto prices. But if you believe in the future of digital assets and you adopt a truly long-term mindset, then Coinbase, trading at a price-to-earnings ratio of only 4, looks like a smart buy right now.
NASDAQ: COIN
Key Data Points
Coinbase is a leveraged bet on the crypto industry
The way I see it, investing in Coinbase is basically a leveraged bet on the growth of the entire crypto industry. Despite the cryptocurrency market being down 45% this year (as of May 12), over time it has risen significantly. And Coinbase has an 11.2% share of the crypto market, a figure that has steadily increased over time. As the crypto market increases in value throughout the next decade, Coinbase will continue attracting a good chunk of those assets.
The number of users Coinbase has will go up as well, thanks to the company's brand recognition, focus on security, and exceptional customer experience. Those 98 million verified users that I mentioned earlier represent approximately one-third of all the crypto users in the world. Assuming Coinbase maintains a similar share, the number of accounts on its platform will soar.
With Coinbase's ongoing progress in developing crypto not only as an investment vehicle but also as a financial system and application platform, individuals and institutions will be encouraged and incentivized to use the products and services more. And this translates to Coinbase's revenue growing faster than the overall crypto market cap.
Add in operating leverage, which just means that expenses for things like tech and development, sales and marketing, and general and administrative functions remain largely fixed as sales increase, and Coinbase's profitability should climb. To summarize, the rising value of the entire crypto market should result in the company's net income (and stock price) rising at an even faster rate due to all of the factors that I just discussed.
This is certainly an interesting way to view an investment in Coinbase, but I think it shows what you have to believe about the business in order for the stock to produce great returns. For someone who thinks cryptocurrencies will continue their long-term trend of becoming more mainstream, it's easy to see Coinbase being at the forefront of that movement. This means the stock's upside is absolutely huge.
