If you had asked me a year ago about Coinbase (COIN 5.68%) making it to the list of growth stocks that could potentially make you a fortune, I would have probably dismissed the idea.
However, recent developments have changed my perspective. Despite my initial reservations, it has become clear that Coinbase has displayed agility and turned things around for the better. So let's explore the possibilities for the company as it pushes the crypto industry forward.
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A revamped revenue model takes hold
First on my list of reasons why I was less than enthusiastic about Coinbase's potential was the company's revenue model. At the time, it was heavily reliant upon one source of revenue: transaction fees. So when the crypto winter set in last year, the lack of diversification became a liability, causing the company to post a net loss of $1 billion in the second quarter of 2022.
Crypto is well known for volatility. So as long as Coinbase remained incapable of generating income during downturns, its concentrated revenue source posed too much risk that would outweigh its potential reward.
But since then, much has changed. In just a year, the company underwent a remarkable transformation and has lessened its dependence on transaction fees. With a diversified revenue model that has produced income amid a brutal crypto bear market, Coinbase is now generating income from its innovative subscriptions and service products, using an international expansion strategy, and even launching its own blockchain, Base.
And cost-cutting has left expenses at their lowest in more than a year. Add it all up, and Coinbase is just $2 million away from turning a profit based on the most recent quarterly earnings report.
With the crypto market's recent resurgence making it look like the crypto winter has eased, it's hard to imagine that Coinbase will not close this gap and return to profitability by the next quarter.
Potential victory in the courtroom
The second reason for my hesitance for Coinbase's long-term potential were the numerous legal battles facing the broader crypto industry. As the cryptocurrency market has evolved, agencies like the Securities and Exchange Commission (SEC) have aggressively launched legal battles to assert authority over digital assets.
Culminating with a subpoena issued to Coinbase in June, citing a 1946 court ruling known as the Howey Test, the SEC's lawsuit alleges that Coinbase sold unregistered securities. If this were determined to be the case, it would seriously threaten Coinbase's core functionality as a crypto exchange and jeopardize any growth prospects.
The initial reaction across the crypto sector was that this might be the nail in the coffin for Coinbase. But sentiment has changed over the year as several judicial and legislative developments have begun to favor the crypto industry.
Most notable is the Ripple case, in which a judge deemed the sale of the token to retail investors did not meet the criteria of a securities sale. The SEC, in a claim that tracks those against Coinbase, accused the crypto of engaging in improper sales of unregistered securities.
Adding to the shift in sentiment are efforts in Congress to introduce favorable crypto legislation, and Bitcoin even becoming a talking point during recent presidential campaign debates.
The recognition of cryptocurrencies as a distinct asset class that is separate from any specific governing body seems to be gaining momentum. While the legal tug-of-war between the SEC and Coinbase will drag on well into 2024, don't be surprised if the company scores a historic victory.
The opportunity at hand
There are few better options for investors seeking authentic long-term growth opportunities than Coinbase. During the past five years, the cryptocurrency market has had a compound annual growth rate (CAGR) of more than 60%, and Coinbase, thanks to recent developments and improvements to its business model, is in a prime position to benefit from this growth.
For the sake of fun, let's speculate: If Coinbase were to ride the waves of growth sweeping through crypto, a 60% CAGR would mean your $10,000 would be worth more than $1.2 million in 10 years. It might be impossible to imagine such phenomenal growth, but early investors in Amazon, Apple, and other tech giants likely couldn't have fathomed the type of progress that has since occurred.
Coinbase stock has been on a tear in 2023, and it's increasingly difficult to imagine a scenario where it doesn't one day reach new highs. As the cryptocurrency market continues its maturation and Coinbase solidifies its role as a leader in the burgeoning industry, investors could be mistaken in overlooking this opportunity to grab shares while they trade 45% below their all-time high.
