Coinbase Global (COIN 7.04%), one of the world's largest cryptocurrency exchanges, went public via a direct listing in April 2021. The stock opened at $381 per share, far above its reference price of $250, but subsequently tumbled to the low $60s in its first year.

When Coinbase went public, Bitcoin (BTC 3.45%) and Ethereum (ETH 2.21%) were hitting fresh all-time highs, and investors eagerly speculated in smaller "altcoins" like Dogecoin (DOGE 1.92%).

An illustration of a Bitcoin in front of trading screens.

Image source: Getty Images.

However, investors lost their appetite for those cryptocurrencies as rising interest rates and other macro headwinds sparked a retreat from riskier assets. Tightening regulations and the failures of several smaller cryptocurrencies exacerbated that painful sell-off.

The market's waning interest in cryptocurrencies was dire news for Coinbase, which generates most of its revenue from transaction fees. As a result, its growth decelerated over the past year, and investors rushed for the exits. Should contrarian investors still buy some shares of Coinbase after that massive sell-off, or is it too late to bet on a long-term recovery?

Is Coinbase's business model falling apart?

In 2021, Coinbase's revenue soared 545% to $7.36 billion as investors flocked to the cryptocurrency market. Its monthly transacting users (MTUs) increased 307% to 11.4 million, its trading volume surged 766% to $1.67 trillion, and the total assets on its platform grew 209% to $278 billion.

But if we break down Coinbase's quarterly numbers, we'll see that its sequential growth has been a lot bumpier. Its sequential declines in MTUs, trading volume, and total assets in the first quarter of 2022 clearly reflect the market's declining interest in cryptocurrencies.

Period

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

MTUs (Millions)

6.1

8.8

7.4

11.4

9.2

Trading Volume

$335B

$462B

$327B

$547B

$309B

Assets on Platform

$223B

$180B

$255B

$278B

$256B

Data source: Coinbase.

Coinbase still grew its MTUs year over year in the first quarter, but an 8% drop in trading volume reduced its total revenues by 27% to $1.17 billion -- which missed analysts' estimates by $320 million.

Coinbase is also growing increasingly dependent on smaller and more volatile cryptocurrencies. In the first quarter of 2022, it only generated 45% of its transaction volume from the two most well-established cryptocurrencies, Bitcoin and Ethereum, compared to 60% a year earlier. The remaining 55% came from "other" crypto assets -- and that opaque segment might still be filled with ticking time bombs.

Vague guidance and widening losses

Coinbase's guidance for the rest of the year was also vague. It expects its MTUs to decline sequentially again in the second quarter and come in somewhere between five to 15 million for the full year -- which implies anything between a 56% decline to 32% growth from 2021.

It also expects its trading volume to decline sequentially in the second quarter and for its average transaction revenue per user to drop to "pre-2021 levels" for the full year. It expects its subscription and services business to generate "strong growth compared to 2021" as it expands its subscription services for both retail and professional traders -- but that segment still only generated 13% of its revenues in the first quarter.

Analysts expect Coinbase's revenue to decline 40% to $4.7 billion this year, but investors should be skeptical of those estimates because they're tethered to unpredictable cryptocurrency prices and equally inconsistent trading volumes.

As Coinbase's top-line growth decelerates, its bottom line is deteriorating. Its net income soared more than 11 times to $3.62 billion in 2021, but slumped to a net loss of $430 million in the first quarter of 2022 as it ramped up its investments. Analysts expect it to post a net loss of $1.66 billion for the full year.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased nearly eightfold to $4.09 billion in 2021 but it expects to post an adjusted EBITDA loss of "approximately $500 million" in 2022 as it endures a "prolonged and stressful scenario for our business."

Coinbase's stock isn't as cheap as it appears

Value-seeking investors might think Coinbase looks cheap at three times this year's sales. But that price-to-sales ratio is pinned to some shaky guidance, and its widening losses will make it an unappealing investment as interest rates rise.

If investors want some exposure to the cryptocurrency market, it makes more sense to directly buy Bitcoin or Ethereum instead of investing in Coinbase's capital-intensive business. In other words, I think it's a bit late to buy Coinbase.