Coinbase Global (COIN 5.41%), one of the most popular cryptocurrency brokerages and exchanges, has been on shareholders' minds lately as a result of all the negativity surrounding the industry. Investors want to know more details about the company and the stock to understand whether they should buy more, hold, or sell out of their positions entirely.
There are some key pieces of information everyone looking at Coinbase needs to know to become better informed. Here's what the smartest investors know about this leading cryptocurrency enterprise.
It's reliant on trading activity
In the most-recently announced results (for the third quarter of 2022, ended Sept. 30), Coinbase generated the bulk of its revenue, 63%, from transaction fees. It has 108 million users paying fees to trade on the platform.
The good news is that when the market is booming, like we saw for much of 2021, Coinbase's business thrives. The company posted net income of $3.6 billion on net revenue of $7.4 billion in that year, profitability most any business would dream of. Rising crypto prices not only increase general interest, but they also draw in speculators who want to trade more.
But the opposite situation can seriously hurt financial performance. Through the first nine months of 2022, Coinbase's revenue was down 52% year over year, and the company posted a net loss of $2.1 billion during that time. This helps explain why the stock has tanked.
Investors certainly want CEO Brian Armstrong to find ways to diversify revenue streams to create a more predictable business. That will be difficult given the volatile nature of the crypto industry overall, but Coinbase does have a subscription and services segment that grew sales 45% year over year in the last quarter. Its progress is something to keep an eye on. Coinbase's subscription revenue is primarily driven by its USDC custody services. It also offers Coinbase One, which includes $0 fees on trades for a flat monthly fee of $30.
It's dealing with the crypto winter
Because Coinbase's success today is so dependent on driving higher trading volume on its platform -- from individual and institutional investors -- last year's crypto market meltdown has had a serious effect on the business. A combination of higher interest rates, macroeconomic weakness, and a number of bankruptcies caused the overall industry to lose roughly two-thirds of its value in calendar 2022.
The crypto market downturn has crushed Coinbase's business and stock price, but if a stock market meltdown happened, major investment banks like JPMorgan Chase or Goldman Sachs wouldn't suddenly become unprofitable. And their shareholders wouldn't question the viability of their business models.
Throughout its history, though, cryptocurrency has mainly only been used as a tool for speculation. So it is prone to boom-and-bust cycles that move with the whims of investors. Only when there is real utility, and people start to use decentralized applications in their daily lives, will the crypto industry show more stability. Then, a crypto market drawdown would be viewed by more people as an opportunity, not something to fear.
In order to ensure survival, Coinbase has reduced its head count, most recently laying off 20% of its workforce. The aim is to bolster the company's financial strength so if the crypto winter continues, it can emerge stronger on the other side.
It has a strong balance sheet
Coinbase shareholders should be confident the company can endure any prolonged downturn in the crypto market. As of Sept. 30, 2022, the business had $5 billion in cash and cash equivalents on its balance sheet with just under $3.4 billion of long-term debt. That's a solid place to be.
And in light of the FTX debacle, Armstrong said his company is far safer than any offshore crypto-exchange operator because it does not engage in risky behavior with client funds.
This should definitely strengthen Coinbase's position in the industry, because its financials must be audited, and it follows the reporting rules of a U.S. publicly listed company.
Management believes that it will at most post an adjusted loss based on EBITDA (earnings before interest, taxes, depreciation, and amortization) of $500 million for the full fiscal year of 2022, which it can certainly handle given its financial condition.
"For 2023, we're preparing with a conservative bias and assuming that the current macroeconomic headwinds will persist and possibly intensify," the leadership wrote in the third-quarter 2022 shareholder letter.
By now, readers should have more familiarity with Coinbase.
