Coinbase Global (COIN 5.68%) likely hasn't made anyone a millionaire since it went public via a direct listing on April 21, 2021. The leading cryptocurrency exchange listed its shares with a reference price of $250, but no shares were actually sold at that price. Its stock opened at $381, soared as high as $429.54, and ended its first trading day at $328.28. It eventually closed at its all-time high of $357.39 during the apex of the growth stock rally on Nov. 9, 2021.
But today, Coinbase trades at about $130. The stock stumbled as cryptocurrency prices declined and rising interest rates drove investors toward more conservative investments. Many investors might be reluctant to buy Coinbase after that steep drawdown, but could it still generate millionaire-making gains for long-term investors?
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The mathematical path toward $1 million
Let's suppose you invest $10,000 in Coinbase today. Assuming its price-to-sales ratio remains unchanged, it would need to grow its revenue at a compound annual growth rate (CAGR) of 26% over the next 20 years for your investment to blossom into $1 million. If we extend that time frame to 30 years, it would need to grow at a CAGR of 17%.
However, Coinbase's growth trajectory is highly unpredictable because it's tightly tethered to the volatile cryptocurrency market. In 2021, its revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 545% and 676%, respectively, as many cryptocurrencies hit their all-time highs.
But in 2022, its revenue fell 57%, and its adjusted EBITDA turned negative. That steep drop was caused by the "crypto winter," which chilled the market as inflation, rising rates, and other macro headwinds drove investors to cash in their coins. Bitcoin, the world's top cryptocurrency, shed 65% of its value for the full year.
For 2023, analysts expect Coinbase's revenue to dip 8% as its adjusted EBITDA turns positive again. That stabilization was supported by rising cryptocurrency prices and aggressive cost-cutting measures across the company.
What's next for Coinbase?
Analysts expect Coinbase's revenue to rise 11% in 2024 and 5% in 2025. They expect its adjusted EBITDA to also grow 11% in 2024 as it continues to rein in its spending, followed by a 1% decline in 2025 as it expands again.
We should be skeptical of those estimates, but they imply the company will lose its momentum as the flat growth of the Tether stablecoin (15% of its trading volume last quarter) and the waning popularity of its "other crypto assets" (28% of its volume) -- including smaller tokens, non-fungible tokens (NFTs), and other assets -- offset its more reliable returns from Bitcoin and Ether (57% of its volume).
That's why Coinbase's stock underperformed Bitcoin and Ether by such a wide margin over the past three years. Investors would have been better off simply buying those cryptocurrencies on Coinbase than investing in the entire exchange.
Source: YCharts.
That gap isn't all that surprising since Coinbase operates a capital-intensive model that gives investors exposure to a lot of bad apples alongside the top cryptocurrencies. The recently approved Bitcoin exchange-traded funds (ETFs) could also replace Coinbase as a simpler way for most investors to gain exposure to the cryptocurrency market.
In that regard, Coinbase is stuck in the same boat as pure-play BTC miners like Marathon Digital and Riot Platforms. All these companies should benefit from rising crypto prices -- but they probably won't outperform the market's leading cryptocurrencies over the long run.
Is Coinbase a millionaire-maker stock?
I believe Bitcoin has a bright future, but I'm not convinced that other smaller cryptocurrencies and altcoins will still be around in a few decades. Coinbase's stock also isn't cheap right now at 10 times its 2024 sales. If the company fails to keep pace with the growth of the broader crypto market, its price-to-sales ratio will likely contract and make it even more difficult for the stock to deliver multibagger gains.
Simply put, Coinbase probably won't grow rapidly enough to achieve millionaire-making gains in 20 or 30 years as long as it's held back by its riskier crypto assets and high operating expenses. Rising crypto prices might drive its stock higher, but it makes more sense to invest directly in the best tokens than in Coinbase's complicated business.
