After closing at an all-time high price of $357.39 in November last year, shares of leading U.S. cryptocurrency brokerage and exchange business Coinbase Global (COIN -2.88%) have plunged 82%. And today, the company sports a market cap just south of $15 billion, which is a far cry from the valuation it carried at its initial public offering in April 2021. This isn't terribly surprising, however, given that the stock tends to reflect what happens in the broader crypto market, which itself has dropped more than 50% in 2022 alone.
But recent comments by Coinbase's founder and CEO, Brian Armstrong, paint a clear picture of where he wants the business to go. Here's what he said and how investors should react.
A new measure of success
"I'd like to get to a place where more than 50% of our revenue is subscription and services," Armstrong said during a recent CNBC interview. In the second quarter, Coinbase's subscription and services revenue was $147.4 million. That represents a 43% year-over-year increase in segment revenue, but still only accounts for 18% of Coinbase's overall business. While this is up considerably from the segment's 5% share in the year-ago period, there is much progress to be made for Armstrong's goal to be reached.
Just over 60% of Coinbase's subscription and services revenue come from blockchain rewards and custodial fees. Blockchain rewards are mostly staking revenue. That's why the recent completion of Ethereum's Merge, where the blockchain transitioned to a proof-of-stake consensus mechanism, will benefit Coinbase: The company can now earn more revenue from staking its clients' Ether. Custodial fees are derived from securely storing client assets.
Additionally, Coinbase makes money from an offering called Coinbase Cloud. This is an infrastructure tool for developers building innovative Web3 products and services. It's like Amazon Web Services, but for cryptocurrencies and blockchain technology.
Upgrading the business model
Why is this such an important focus for Coinbase's management team? Well, in 2021, the company generated 93% of its total revenue from transaction fees. This business line is extremely volatile and unpredictable on a quarterly basis; its success depends on how the overall crypto market is performing.
If prices move higher, interest in digital assets increases as well, and the activity on Coinbase's platform gets a boost. However, the opposite is also true, as we saw in the second quarter -- an incredibly bearish time for the crypto market -- when transaction revenue was down 66.1% year over year.
This dynamic has also impacted Coinbase's stock price. In times of market exuberance, like we saw during October and early November last year, shares skyrocketed. But as the Federal Reserve started hiking interest rates to curb soaring inflation, investors began to sour on the riskiest assets, including cryptocurrencies. This situation crushed Coinbase stock.
Growing subscription and services, a more stable business line, is key to making the company's performance more sustainable and consistent over the long term. What's more, it can be a catalyst that helps to turn around the stock price.
Armstrong and his team are investing in and prioritizing the development of five key areas to make this happen: The Coinbase Retail App, Coinbase Prime, Staking, Coinbase Cloud, and Web3. With the Retail App, the goal is to bring the next 100 million users into the crypto space. A more ambitious aim is to enable 1 billion people to use Web3 products on a daily basis.
Coinbase wants to usher in the next era of cryptocurrencies, one that is dominated by utility as opposed to financial speculation. And this is what investors desperately want.
Investors must be patient
Coinbase was founded in 2012 with the simple objective of making it easy for users to buy and sell Bitcoin. The leadership group correctly predicted that over time, more individuals and institutions would be interested in cryptocurrencies. And so, management built the leading gateway to access this new asset class. Clearly, this has benefited the company and has resulted in its success over the past decade. But now, it's time to focus on the next phase -- the subscription and services business line.
Armstrong's comments were the right thing to say. From a shareholder's perspective, this is welcome news. Ultimately, time will tell whether management can execute.