Bitcoin's (BTC 0.92%) price has risen about 10% over the past month, seemingly stabilizing above the $20,000 level, as selling pressure across the cryptocurrency market has gradually eased. That stabilization has brought some buyers back to the market's beaten-down Bitcoin-related stocks.
Both Block (SQ -1.68%) and Coinbase Global (COIN -0.34%) have rallied more than 10% over the past month. Should investors buy either as a turnaround bet on the Bitcoin market?
Image source: Getty Images.
Neither stock is a pure Bitcoin play
Block's and Coinbase's stocks often trade in tandem with Bitcoin's volatile prices, but neither company is a pure play on the cryptocurrency.
In its latest quarter, Block generated 44% of its revenue from Bitcoin trades on its Cash App. It generated 36% of its revenue from transactions, subscriptions, services, and hardware sales from its Square payments ecosystem and another 18% from the Cash App's payments and other services.
Block, formerly known as Square, added Bitcoin trades to the Cash App back in early 2018. About 10 million Cash App users have bought Bitcoin since then, but it's been a double-edged sword: Bitcoin brought in significantly more revenue for Block, especially throughout the cryptocurrency market's wild expansion throughout the pandemic, but the margins of its Bitcoin sales are much lower than the margins of Square's seller-oriented services. Bitcoin's volatility also offsets the relative stability of Block's other platforms.
Coinbase is one of the world's largest cryptocurrency exchanges. In its latest quarter, it generated 41% of its total transaction revenue from Bitcoin. Ethereum accounted for 19% of its transaction revenue, while the rest came from other crypto assets.
Coinbase's business model is entirely tethered to the volatile crypto market, and Bitcoin is ironically its most stable category of transactions -- since Ether and the smaller cryptocurrencies are usually even more volatile.
Which company is growing faster?
Block and Coinbase both experienced accelerating revenue growth last year as the rise of speculative retail trading and money available from stimulus checks helped boosted the prices of many cryptocurrencies, including Bitcoin, to all-time highs. However, both companies have faced severe slowdowns this year as rising interest rates drive investors away from riskier assets.
|
Company |
2020 |
2021 |
Q1 2022 |
|---|---|---|---|
|
Block |
48% |
62% |
(22%) |
|
Coinbase |
139% |
514% |
(35%) |
Year-over-year revenue growth. Data source: Company earnings reports.
In 2020, Block's rising Bitcoin revenue offset the pandemic-induced slowdown of Square's seller-oriented services. As its Bitcoin business cooled off, its higher-margin seller-oriented services recovered in a post-lockdown market and cushioned that blow. That's why Block's gross profits actually rose 34% year over year in the first quarter of 2022, even as its revenue declined 22%.
But over the next few quarters, macro headwinds -- especially inflation and a possible recession -- will likely throttle the growth of Square's seller ecosystem as Bitcoin's price stagnates. Its recent acquisition of the buy now, pay later (BNPL) platform Afterpay, which is deeply unprofitable, will further squeeze the company's margins. As a result, analysts expect it to rack up a net loss for the full year.
Coinbase's growth has been completely driven by the buying frenzy in the crypto market over the past two years. Its average monthly transacting users (MTUs) more than quadrupled to 11.4 million in 2021 but declined sequentially to 9.2 million in the first quarter of 2022.
The company broadly (and unhelpfully) expects its MTUs to land somewhere between 5 million and 15 million for the full year, but it also recently laid off nearly a fifth of its workforce as CEO Brian Armstrong told investors to brace for a new "crypto winter." Coinbase became profitable in 2020 and 2021, but it's expected to bleed red ink again in 2022 as the crypto market cools off.
The estimates and the valuations
Analysts expect Block's revenue to stay nearly flat at $17.7 billion this year as it posts a net loss of $681 million, compared to a net profit of $166 million in 2021. In 2023, they expect its revenue to rise 20% to $21.3 billion with a narrower net loss of $216 million.
Coinbase's future looks bleaker. Analysts expect its revenue to plunge 50% to $3.9 billion this year before bouncing back 32% to $5.2 billion in 2023. They expect it to post a net loss of $2.3 billion this year versus a net profit of $3.0 billion in 2021, and for that loss to narrow to $626 million in 2023. But I wouldn't put too much faith in those longer-term estimates since they're tightly tethered to the unpredictable cryptocurrency market.
Based on these expectations, Block and Coinbase trade at 2 times and 3 times this year's sales, respectively. I'm not a fan of either stock right now -- and Bitcoin miners might be better "pure plays" on the stabilizing cryptocurrency -- but Block is clearly a better pick than Coinbase right now.
