Is It Too Late to Buy Coinbase Global Stock?

Coinbase Global's (COIN 3.50%) stock jumped 18% on May 5 after the cryptocurrency exchange operator posted its first-quarter report. Its revenue dropped 37% year over year to $736 million but beat analysts' estimates by $81 million.

It narrowed its net loss from $430 million to $79 million, or $0.34 per share, which also cleared the consensus forecast by $1.11. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it posted a profit of $284 million and finally ended its three-quarter streak of adjusted EBITDA losses.

Image source: Getty Images.

Coinbase cleared Wall Street's low bar, which had been set accordingly to account for the cryptocurrency market's crash over the past year, but its stock remains more than 80% below its all-time high from November 2021. Does Coinbase's post-earnings pop indicate brighter days are ahead? Or is it too late to buy this out-of-favor crypto stock?

What happened to Coinbase?

As one of the world's largest cryptocurrency exchanges, Coinbase generates about half of its revenue from transaction fees and the other half from add-on services and subscriptions. Its growth can be measured by its monthly transacting users (MTUs), trading volume, and assets on platform (AOP).

Coinbase's growth peaked in the fourth quarter of 2021 when its MTUs reached 11.2 million, its trading volume hit $327 billion, and its AOP rose to $255 billion. But its trading volume and AOP plummeted over the past year as interest rates rose and the crypto market crashed, and it stopped disclosing its MTUs altogether in the first quarter of 2023. It made that abrupt change after admitting it had accidentally overstated some of its MTU figures in 2021.

Data source: Coinbase.

On a year-over-year basis, Coinbase's revenue has declined for five consecutive quarters. But on a sequential basis, its revenue has risen for two straight quarters: 5% in Q4 and another 22% in Q1. That recovery coincides with the broader recovery of the crypto market. For example, here's how Bitcoin and Ethereum, which accounted for 36% and 18% of Coinbase's Q1 transactions, respectively, fared over the past six months:

Data source: YCharts.

It's impossible to tell if that recovery will continue. But if it does, Coinbase's sequential growth rates could accelerate and pave the way toward its year-over-year growth again. Coinbase didn't provide any clear guidance for the rest of the year, but analysts expect its revenue to decline 9% to $2.9 billion in 2023 and grow 13% to $3.3 billion in 2024.

Focusing on the factors it can control

We should be deeply skeptical of those forecasts, since crypto prices are notoriously volatile. Even Coinbase's CEO Brian Armstrong sounded the alarms of a "crypto winter" which could last for an "extended period" last June. So instead of trying to time the near-term movements of the crypto market, Coinbase is focusing on two factors it can control.

First, it's expanding its subscription and services ecosystem to lock in its customers, diversify its top line away from trading fees, and widen its moat against commission-free crypto trading platforms like Robinhood (HOOD 0.09%). It also expects its recent acquisition of One River Asset Management to complement that strategy. 

Second, it's aggressively cutting costs. It laid off 20% of its employees last year, and it cut another 20% of its remaining employees this year. Those layoffs reduced its operating expenses by 48% year over year and 24% sequentially to $896 million in the first quarter. Its stock-based compensation expenses -- a major source of its generally accepted accounting principles (GAAP) losses -- also declined 44% year over year and 54% sequentially to $199 million.

Analysts expect Coinbase's adjusted EBITDA to come in at positive $163 million in 2023, compared to a loss of $371 million in 2022, and to rise to $500 million in 2024. Based on those forecasts, which we should take with a grain of salt, Coinbase doesn't look too expensive at three times next year's sales and 22 times its adjusted EBITDA. By comparison, Robinhood trades at four times next year's sales and 19 times its adjusted EBITDA.

However, many investors will likely avoid Coinbase, Robinhood, and other crypto-related stocks as long as interest rates remain elevated. Those high rates, along with the challenging macro environment, will also likely drive investors to focus on their lack of GAAP profits instead of their rosier adjusted EBITDA figures.

Just buy Bitcoin or Ethereum instead

If you're bullish on the crypto market, it makes more sense to buy Bitcoin, Ethereum, or other cryptocurrencies instead of investing in Coinbase.

Coinbase might seem like a diversified way to gain exposure to the crypto market, but it also operates a capital-intensive business which faces unpredictable regulatory challenges, macro headwinds, and competitive pressure. In short, I believe it's too late for investors who missed Coinbase's heyday rally in 2021 to hop aboard the bandwagon now. The leading cryptocurrencies look like safer routes of entry into the cryptocurrency market.