Cryptocurrencies have been getting crushed in recent months. And because of this, Coinbase (COIN 5.68%), is under serious pressure. The top U.S. crypto brokerage and exchange operator reported a 35% year-over-year revenue decline and a $430 million net loss in the first quarter of 2022, a major reversal of fortune compared with prior quarters. And the stock, which is down 74% so far this year, is hurting shareholders' portfolios.
However, there is another stakeholder group that is feeling the brunt of Coinbase's struggles, and it is something that investors need to know about. Let's take a closer look.
Making a difficult decision
Like many other tech companies, including Meta Platforms, Netflix, and Salesforce, Coinbase recently implemented a hiring freeze. After starting the year with plans to triple the employee headcount in 2022, the emphasis now is to focus on the most pressing business needs, like security and compliance.
To make matters even worse, management made the decision to rescind job offers that had already been made, with very few exceptions. While Coinbase will provide these unfortunate people with severance and career help, it is an extremely disheartening move. Not only is this not a good look for the business, but the negative impact on those affected could be harsh.
What's striking about Coinbase's move is the complete turnaround that the leadership team just made. As recently as May 10, it said that Coinbase would continue investing heavily to bolster growth for the rest of the year. This upbeat perspective was despite broader crypto market weakness that management was already aware of.
The leadership team, led by founder and CEO Brian Armstrong, could no doubt have done a better job at trying to avoid this whole mess. During the 12-month period between the end of Q1 2021 through the end of Q1 2022, Coinbase increased its full-time headcount by 183%. Maybe the business overextended.
Dark clouds ahead
With the Federal Reserve planning to raise interest rates aggressively throughout the rest of the year in an effort to curb soaring inflation, some experts are warning of a recession on the horizon. While no business wants to operate in a weak economic environment, in Coinbase's case, the effect of a recession could be absolutely brutal.
Image source: Getty Images.
Since Coinbase's founding in 2012, it has navigated through multiple crypto winters, or extended periods of time when prices for digital assets remain under pressure. But it hasn't had to deal with an actual recession (apart from the short-lived, pandemic-induced downturn in 2020). Even Bitcoin, the world's most valuable cryptocurrency, was created on the heels of the Great Recession.
If stocks fall out of favor during recessions, just imagine how investors might view crypto. We're already seeing this, as the market for digital assets is down about 60% since peaking last November. Because 93% of Coinbase's revenue in 2021 came from transaction fees, any major falloff in individual and institutional interest in trading will significantly hurt the business. Management's decision to stop hiring, as well as to rescind existing job offers, probably means that it sees an extremely difficult macroeconomic scenario in the near future.
The takeaway for investors
I don't think the mental model changes for shareholders after this news. Before even considering an investment in Coinbase stock, which today trades at an insanely cheap price-to-earnings ratio of slightly more than 7, one must adopt a very long-term time horizon. This is also the case with owning any particular cryptocurrency. The volatility is definitely gut-wrenching. But if the belief is that crypto will become a bigger part of people's everyday lives five years or even a decade from now, then owning Coinbase shares is a sound investment decision today.
Emilie Choi, Coinbase's COO, tried to ease any concerns. "We're in a strong position -- we have a solid balance sheet and we've been through several market downturns before, and we've emerged stronger every time," she said in a note to employees. As of March 31, the business had $6.1 billion in cash and cash equivalents on the balance sheet, a cushion that will help Coinbase weather even a lengthy storm.
Being able to handle the inevitable ups and downs, not only with the company's underlying fundamentals but also with broader crypto prices, is the name of the game. For what it's worth, I'm still a long-term crypto bull, so I view the current situation as nothing more than a temporary speed bump that management will figure out a way to navigate through. Nonetheless, it demonstrates the extreme measures companies will take to ensure their survival and ultimate success.
