Given that we are in the midst of a crypto winter, I don't think investors had high hopes coming into Coinbase's (COIN 4.68%) second-quarter earnings report. But actual results came in even worse than anticipated. Coinbase reported a loss of $4.68 per share on net revenue of $803 million during the quarter, along with weak guidance for the rest of the year. Despite a recent rally, Coinbase's stock is still down more than 63% this year. Is it time to abandon the stock?
Worrisome trends
Net revenue and earnings for Coinbase came in at the lowest levels seen in five quarters. Monthly transacting users (MTUs) on the platform in Q2 were about 9 million, which, while up slightly on a year-over-year basis, have fallen in a big way in the first six months of the year. Trading volume on the platform of $217 billion in Q2 is down 53% from 2021's Q2, and assets on the platform fell by nearly 47% year over year.
Image source: Getty Images.
Coinbase's guidance didn't exactly inspire confidence either. The company said that total trading volume in July came in at $51 billion, which would result in even weaker trading volume in the third quarter of the year if the trend continues. Coinbase also expects annual average MTUs to finish the year somewhere between 7 million and 9 million. If the number ends up toward the lower end of that range, it would represent a steep drop in MTUs for the remainder of the year.
Finally, Coinbase has previously pledged to keep annual losses for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to no more than $500 million. In its letter to shareholders, the company said it is "working hard" to operate within this bound. So far, Coinbase is at an adjusted EBITDA loss of $131 million for the first half of the year, meaning the company expects the second half to be a lot more challenging.
Dealing with challenges to the business
Coinbase is heavily reliant on the revenue it makes from commissions on retail trades, but as more exchanges have joined the space and gotten more competitive, the large crypto exchange has seen fee compression. The crypto exchange at one point could charge as much as 4% on some retail trades, but those fees have fallen to 1.5% now.
Still, since the drop to 1.5%, management said they have not seen compression this year, despite the fact that some crypto exchanges are now offering commission-free trades. Management does expect to see compression on a long-term basis, however, and as such has been working to alter its model, particularly by offering a subscription product called Coinbase One that gives members a number of services, including commission-free trading for a monthly charge. In Q2, subscription and services revenue at Coinbase fell slightly from the prior quarter but is up about 44% year over year. It made up more than 18% of revenue in Q2, so while the company still has work to do, progress is being made on the subscription front.
Coinbase has also worked to further serve institutional traders and has more than doubled the number of institutional clients on its platform since 2020. It now has more than 14,500 customers, and 1,500 of those customers were added in Q2 alone. Fees are lower for this group and still don't make up a significant part of transactional revenue, but there could be further monetization opportunities down the line.
Additionally, Coinbase recently announced a big partnership with BlackRock (NYSE: BLK), the largest asset manager in the world, to help them offer crypto services to their clients. Coinbase CEO Brian Armstrong said it took several years to close this deal, and the company closed it during a crypto winter.
Should you abandon the stock?
While I do see lots of challenges ahead as Coinbase tries to transition from a retail trading fee model to one with lots more revenue diversity, the company has made progress with its subscription offering and in the institutional space. Coinbase also has a very trusted brand and nearly $5.7 billion of cash and cash equivalents on its balance sheet.
Good inflation news this morning should help cryptocurrencies bounce back, especially if we continue to see consumer prices abate in the months ahead. The near-term road could be bumpy, but I do think Coinbase has good long-term potential as long as cryptocurrencies and crypto trading remain relevant.
