Coinbase Global (COIN 5.68%) shares jumped 58.8% last month, according to data provided by S&P Global Market Intelligence. The stock benefited from a combination of strong quarterly results and soaring cryptocurrency prices. The company is capitalizing on more accommodative capital market conditions, and things are looking increasingly attractive for the upcoming quarters.
Quarterly earnings were impressive
Coinbase comfortably surpassed analyst estimates for revenue and earnings. Revenue increased 50% over the prior year, exceeding Wall Street's forecast by roughly 15%. Analysts expected the company to break even for the quarter, but it delivered $1.04 of generally accepted accounting principles (GAAP) earnings per share and over $100 million of operating income.
The surprise was all about rising cryptocurrency prices and mounting interest in the asset class among investors. The recent launch of exchange-traded funds (ETFs) that hold Bitcoin is stimulating institutional demand while further normalizing crypto assets that many investors still view skeptically. Surging crypto prices have reignited dormant excitement about blockchain projects and tokens, creating a self-propelling hype cycle.
Coinbase is one of the largest corporate beneficiaries of this trend. It reported an 83% increase in transaction revenue over the prior quarter. This helped spur the top line 41% above the prior quarter and 51% above the year-ago quarter. The company has also done an excellent job of diversifying revenue streams with high-growth service and subscription fees. Transaction revenue was only half of the total income during 2023, having been nearly all of revenue as recently as the first quarter of 2022.
Importantly, Coinbase was able to capture much of these improvements on the bottom line. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) expanded nearly 70% from the prior quarter. This shows that the company has significant fixed costs that will provide significant gains from scale. This can be dangerous when transaction revenue drops, but it yields impressive results during boom times.
Coinbase's cost-cutting initiatives have been impressive. It reported significant reductions in operating expenses related to sales and marketing, research and development, and corporate administrative functions. These broad-based cuts didn't impede growth, as the company rolled out new products in new markets around the world.
Correlation is important
Coinbase is one of those stocks that can move significantly any given day without any company-specific news. It's highly correlated to Bitcoin prices, thanks to the connection between its top-line performance and crypto prices. Interest in crypto assets increases transaction volume, transaction value, and overall demand for wallets and related services.
Those forces have been a major catalyst for Coinbase stock in recent months, and this relationship is likely to continue. As it stands, the stock looks rather expensive, with a forward P/E ratio above 200, a price-to-sales ratio approaching 20, and a price-to-book value around 10. These are all highly speculative ratios, and the company's cash flows are likely to be volatile and unpredictable for at least a few years to come. Coinbase stock is essentially a bet on the widespread acceptance of cryptocurrencies and blockchain tokens as an asset class. The stock is likely to remain volatile in the short term, but there's upside if the transformative potential of this technology is fully realized.
