Is Coinbase Global Stock a Buy Now?

Coinbase Global's (COIN -5.10%) stock plunged 12% on Tuesday after the Securities and Exchange Commission (SEC) sued the cryptocurrency exchange for "operating as an unregistered securities exchange, broker, and clearing agency." The SEC alleges that Coinbase made "billions of dollars" by "unlawfully facilitating the buying and selling of crypto asset securities," and its failure to operate as a registered exchange "deprived investors of significant protections."

The SEC's move wasn't surprising since it had just filed a suit against Coinbase's competitor Binance a day earlier based on similar allegations. The SEC also previously blocked Coinbase's plans to launch an interest-bearing product in 2021, and repeatedly warned that it would expand its definition of "securities dealer" to cover cryptocurrency exchanges. The collapse of UST and Terra Luna, the bankruptcy of FTX, and other crypto disasters likely drove the SEC to accelerate its crackdown.

Image source: Getty Images.

In response, Coinbase CEO Brian Armstrong pointed out that the SEC allowed his company to go public in 2021, that there was still no path to simply "come in and register" as a crypto exchange, and that the SEC and the Commodity Futures Trading Commission (CFTC) were still at odds over the question of whether cryptocurrencies were securities or commodities. Armstrong also said Coinbase remained "confident in our facts and the law."

This conflict won't end anytime soon. However, with Coinbase's shares remaining 85% below their all-time high, should investors consider buying them before the conflict is finally resolved?

It's still freezing as the crypto winter continues

In 2021, Coinbase's revenue surged by 545% to $7.36 billion as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 676% to $4.09 billion. That growth was driven by the buying frenzy in cryptocurrencies, which was part of the retail rush toward meme stocks, growth stocks, high-risk options, and other speculative assets.

Coinbase's growth peaked in the fourth quarter of 2021 when its monthly transacting users (MTUs) reached 11.2 million, its trading volume surged to $327 billion, and its assets on platform (AOP) ballooned to $255 billion. But over the past year, its MTUs declined sharply and it lost more than half of its trading volume and AOP. It also stopped disclosing its MTUs in the first quarter of 2023 after admitting that it had overstated some of its MTU figures in 2021. 

Data source: Coinbase.

In 2022, Coinbase's revenue plunged by 51% to $3.15 billion and its adjusted EBITDA turned negative with a loss of $371 million. Last June, Armstrong predicted the slowdown would persist amid the crypto winter.

That decline was largely triggered by rising interest rates, which ended the buying frenzy for speculative assets and drove investors toward more conservative investments. The price of Bitcoin plummeted from a peak of more than $65,000 in November 2021 to below $16,000 in November 2022, and sits at about $26,500 today. The price of Ether also dropped from an all-time high of more than $4,800 in November 2021 to below $1,100 in June 2022, and trades at approximately $1,850 as of this writing.

As crypto prices crashed, regulators across the world tightened the screws on cryptocurrency exchanges. That pressure likely caused some crypto traders to shun Coinbase while preventing investors from betting on its potential turnaround.

But it's not all bad news

Coinbase's future might seem bleak, but its revenue actually grew sequentially over the past two quarters as the crypto market stabilized. The company is also aggressively cutting costs -- it laid off 20% of its workforce in 2022, and it cut another 20% of those who remained earlier this year -- to stabilize its bottom line. As a result, analysts expect Coinbase to generate a positive adjusted EBITDA of $457 million in 2023, even as its revenue declines by another 10% to $2.87 billion.

We should take those estimates with a grain of salt since they're tethered to the unpredictable crypto market, but Coinbase's stock looks reasonably valued relative to those estimates at 3.5 times this year's sales and 22 times its adjusted EBITDA.

Yet I wouldn't consider Coinbase a bargain, especially when plenty of other promising growth stocks are trading at similar valuations. It's also tough to recommend buying Coinbase as a turnaround play when the SEC clearly intends to rein in the company (and the broader crypto industry) with stronger regulation.

Simply put, I don't see any compelling reasons to buy Coinbase yet. It might eventually bounce back if the cryptocurrency market stabilizes and grows again, but it would arguably be smarter to simply buy Bitcoin or Ether -- instead of investing in Coinbase's capital-intensive business -- to capitalize on that potential recovery.