Coinbase's (COIN -0.34%) stock opened at $381 a share upon its direct listing on April 14, 2021. But today, this volatile stock trades in the low $40s. The leading cryptocurrency exchange lost its luster as crypto prices plunged and rising interest rates drove investors away from speculative growth stocks.
Coinbase CEO Brian Armstrong's dire warning of a new "crypto winter" last June suggested the bears were right, while the failures of several high-profile tokens and exchanges (including FTX) tarnished the entire sector and attracted a lot of unwanted attention from government regulators. But could Coinbase's stock bounce back over the next 12 months? Let's review its recent slowdown, near-term challenges, and valuations to decide.
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An all-in play on the cryptocurrency market
As one of the largest cryptocurrency exchanges in the world, Coinbase generates most of its revenue from transaction fees. Retail investors accounted for 95% of its total transaction revenues in the third quarter of 2022, while the remaining 5% came from larger institutional investors.
Coinbase's high exposure to smaller retail investors enabled it to capitalize on the stimulus-induced stampede toward cryptocurrencies in 2020 and 2021. That's why Bitcoin (BTC 0.38%) and Ether (ETH 0.07%) rallied to their all-time highs of about $68,000 and $4,800, respectively, in November 2021.
But that exposure also backfired throughout 2022 as rising rates caused investors to sell their cryptocurrencies. Today, Bitcoin and Ether -- which together accounted for 64% of Coinbase's trading volume in its latest quarter -- trade at about $17,000 and $1,300, respectively. As those prices plummeted, jaded investors stopped trading cryptocurrencies so frequently.
Coinbase's monthly transacting users (MTUs) hit a peak of 11.2 million in the fourth quarter of 2021 but slid sequentially throughout 2022 to just 8.5 million in Q3 2022. During that same period, its quarterly trading volume fell from $547 billion to $159 billion, while the total assets on its platform shrank from $278 billion to $101 billion.
After soaring 544% to $7.4 billion in 2021, Coinbase's revenue dropped 52% year over year to $2.6 billion in the first nine months of 2022. It also posted a net loss of $2.1 billion during those nine months, compared to a net profit of $3.6 billion a year earlier. It ended Q3 with $5.0 billion in cash and equivalents, but it still had $7.1 billion in long-term debt on its balance sheet. The first $1.4 billion tranche of that debt matures in 2026, which raises troubling questions about Coinbase's ability to remain solvent if the crypto winter turns into a multiyear ice age.
What's Coinbase's plan for 2023?
Analysts expect Coinbase's revenue to decline 60% to $3.2 billion in 2022 and dip 2% to $3.1 billion in 2023. It's expected to post a net loss of $2.6 billion in 2022, followed by a narrower net loss of $1.4 billion in 2023. On an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) basis, the company expects to post a net loss of about $500 million in 2022 -- compared to a profit of $4.1 billion in 2021.
We should take all those estimates, which are tethered to the unpredictable cryptocurrency market, with a grain of salt. However, Coinbase's prospects could certainly improve if interest rates stabilize, a new bull market starts, and investors develop a healthy appetite for cryptocurrencies again. Based on those expectations and Coinbase's enterprise value of $7.8 billion, its stock doesn't look terribly expensive at 2.5 times next year's sales.
For 2023, Coinbase will focus on downsizing its workforce, withstanding the regulatory headwinds, and avoiding the same fate as FTX and other failed exchanges. It's already laid off 2,110 workers in three rounds of layoffs since last June, and it expects to complete all of those restructuring efforts by the second quarter of 2023.
Coinbase also recently reached a $100 million settlement with the New York State Department of Financial Services (DFS) to address its lack of background checks on new customers. That penalty will inevitably throttle its near-term cash flow, but conducting adequate background checks might reduce some of the regulatory pressure on its core business.
Where will Coinbase's stock be in 12 months?
I don't expect Coinbase's stock to rebound to its all-time highs anytime soon. But I also think its downside potential will be limited in 2023 if the prices of Bitcoin, Ether, and other leading cryptocurrencies bottom out. The failures of FTX and other cryptocurrency exchanges could also strengthen Coinbase's reputation as the best house in a bad neighborhood.
I believe the cryptocurrency market will remain sluggish in 2023 as interest rates remain elevated. Since Coinbase's stock remains tethered to those prices, it could trade sideways this year until investors pivot toward riskier growth plays again.
