The crypto downturn throughout 2022 dealt a huge blow to Coinbase (COIN 5.68%) and its fortunes. Last year, revenue declined 59%, and the business posted a net loss of $2.7 billion. It's no wonder the shares tanked 86% during the year.
But a resurgence has taken place this year. Coinbase appears to be gaining some strong business momentum. And investors seem to think so as well, and the cryptocurrency stock has skyrocketed 400% in 2023.
But don't rush to scoop up shares just yet. Here are three things you need to know before buying Coinbase.
1. Management's ultimate strategic vision
Bearish investors never hesitated to point out that Coinbase was overly reliant on trading activity and transaction revenue for its financial success. In 2022, 77% of revenue was derived from these fees. Higher prices for digital assets naturally drew in more speculators, benefiting Coinbase.
However, the leadership team is focused on diversifying the business. Through the first nine months of 2023, transaction revenue accounted for 46% of the total, meaningfully lower than last year.
The remainder comes from subscriptions and services. This includes custodial services, blockchain rewards, and stablecoin revenue. This segment posted stellar revenue growth of 59% last quarter. Should it continue to rise in importance, it will add a level of predictability to Coinbase's operations.
Brian Armstrong, founder and chief executive officer, has highlighted his team's ultimate ambitions: to transition cryptocurrencies from being purely a tool for financial speculation to one used for financial services, and then ultimately for greater utility as a new internet paradigm.
In the future, I think executives would like to see Coinbase's business be more like Apple's iPhone or App Store, where users interact with various cryptocurrencies on a daily basis. And Coinbase can be the platform that allows this to happen in a very intuitive and seamless way.
Additionally, Coinbase Cloud, which provides developers with infrastructure tools to build their own blockchain applications, could be seen like Amazon Web Services for the crypto industry. This is an important initiative to pay attention to in years to come.
2. It's on the path back to profitability
Coinbase was incredibly profitable in 2021, reporting a superb net income margin of 46%. However, the crypto market downturn exposed the company's bloated cost structure, resulting in huge losses as revenue dropped sharply.
Things are starting to turn around for the better. Due to expense reductions, Coinbase is now becoming a leaner organization. The operating loss in Q3 of $80 million represented a major improvement from the loss of $556 million a year ago.
The hope for shareholders is that Coinbase isn't sacrificing the chance to invest in growth opportunities by aggressively cutting costs. But in a period of higher interest rates and economic uncertainty, investors should demand sounder financial results. The company has already shown how profitable it can be in good times. Getting back to that point should help the stock price.
3. The key to Coinbase's success
As much as Coinbase likes to tout how its revenue stream is becoming more diversified, the business can't escape the reality that its ultimate success still hinges on the rise of crypto asset prices. The company's financial performance and stock price mimics what happens with the broader industry. And I don't think it's going to change anytime soon, if at all. Investors need to realize this.
This presents some risks. Cryptocurrency prices are inherently unpredictable in the short term, which means Coinbase's financials are too. Remember this anytime the management team or a Wall Street analyst make any forecasts about the direction of the business. I don't think anyone knows.
To be fair, on a long-enough time horizon, cryptocurrencies have increased in value. But will the industry still be around a decade from now? It's not 100% certain. Regulatory changes and a lack of real-world utility could negatively impact things.
Investors who still want to buy this stock should know that Coinbase is ultimately a bet on the growth of the overall cryptocurrency market.
