Since the start of 2023, the cryptocurrency market has experienced strong positive momentum, having climbed from about $800 billion to just under $2 trillion in value in roughly the past 14 months. Coinbase (COIN +5.66%), one of the largest brokerage and exchange operators in the industry, has benefited tremendously.
The cryptocurrency enterprise reported revenue growth of 50% in the most recent quarter (Q4 2023 ended Dec. 31), as trading volumes picked up amid market enthusiasm. And investors might have been even more encouraged by the fact that the business reported net income of $95 million last year, a huge rebound from the $2.6 billion net loss posted in 2022.
Is this bottom-line performance enough to reassure Coinbase shareholders?
Volatile market, volatile business
We've already seen how incredibly profitable this business can be in robust market conditions. In 2021, during a euphoric period for the crypto industry, Coinbase generated net income of $3.6 billion on revenue of $7.8 billion, good for a fantastic 46% margin.
However, as is the case with the volatile crypto market, the company's financial results can be a roller coaster ride from year to year. In 2022, the business registered that huge net loss as revenue was cut in half. Things turned around last year, but that's only because crypto asset prices have been on a major rebound.
This highlights just how volatile Coinbase's financials can be from quarter to quarter and year to year. Imagine how difficult it is for the executive team to manage expenses for product development and marketing when they have almost no way to foretell what will happen with the crypto market in the near term.
It's also worth mentioning that Coinbase was only able to produce positive net income due to a one-time income tax benefit. Excluding this, the company reported an operating loss of $162 million in 2023.
NASDAQ: COIN
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Looking ahead
To its credit, Coinbase was able to make notable improvements last year. For starters, its 2023 operating expenses of $3.3 billion were about 44% lower than a year before. A lower employee headcount helped here.
After monster growth a few years ago, the business is aiming to be a leaner and more efficient organization. Running a tighter ship can help ensure Coinbase is financially sound when market conditions deteriorate, as they will again at some point in the future.
Management is also intensely focused on relying less on unpredictable trading volume and fees and more on recurring revenue streams. It's encouraging to see subscription and services revenue, which accounted for 41% of the company's net total in the fourth quarter, rise by 33% year over year. This division includes staking fees, custody solutions, and interest income.
However, despite Coinbase's impressive momentum. I think investors who are hoping for consistent top-line growth and sustainable profitability should seriously temper their expectations. It's anyone's guess if the company will be profitable in 2024.
For what it's worth, Wall Street analyst estimates on average call for earnings per share of $1.27 this year. But by 2026, these same analysts are forecasting a $0.42 loss. This exemplifies the business's persistent volatility, as no one can get an accurate grasp on the state of Coinbase in the future.
At a current price-to-sales multiple of 13.3, perhaps the stock has gotten a bit ahead of itself, as it looks like optimism might be fully priced in. But investors who still believe in the long-term potential of cryptocurrencies could do much worse than add Coinbase to their portfolios. If this is how you view things, just make sure to maintain a very long-term mentality.
