Coinbase (COIN 5.68%) has taken its investors on a wild ride. Its shares tanked by more than 90% in late 2021 and 2022 as a crypto winter took hold of the industry. But from the start of 2023 through March 12, shares have rebounded by 615%. They're now more or less where they began 2022, though still down about 28% from their peak. The business is seeing strong momentum.
Before you rush in to buy this top crypto stock, here are three things you need to know.
1. It's becoming a steady and predictable enterprise
Coinbase was founded in 2012 with the sole purpose of making it easier for people to buy and sell Bitcoin. Today, facilitating the trading of hundreds of cryptocurrencies remains an important part of this business. In 2022, 75% of Coinbase's revenue came from transaction fees on such trades.
To diversify its business model, and make sales and profits less volatile and exposed to the whims of the broader crypto market, management wants to boost subscriptions and services. Its efforts on that front are already bearing fruit: Transaction revenue of $1.5 billion accounted for 52% of 2023's net total revenue.
Within the subscriptions and services segment, Coinbase offers staking, custody solutions, and the use of stablecoins. The point is to transition crypto from a product used mainly by speculative investors seeking financial gain into an industry where people find real utility.
With this perspective, we can view Coinbase as potentially becoming a version of the Apple App Store, but with all decentralized applications. And for enterprises, Coinbase Cloud, a developer toolkit that provides the infrastructure to build blockchain services, could be seen as the Amazon Web Services of the crypto world. Only time will tell if this will play out.
2. Management is driving greater efficiencies
Coinbase has already shown that it can be a profitable business when market conditions favor it. When the crypto industry was booming in 2021, the company generated $3.6 billion of net income on $7.4 billion of revenue.
Unsurprisingly, when crypto prices tanked in 2022, Coinbase posted a $2.6 billion loss. But its leadership team has focused on driving greater efficiencies across the organization to handle fluctuating demand trends.
Progress is already being made. In 2023, the business posted a net income of $95 million, a welcome reversal from the losses of the previous year. This improvement was only possible because Coinbase is a much leaner organization now. Operating expenses totaled $3.3 billion in the last 12 months, down 45% from $5.9 billion in 2022. This new focus hasn't prevented Coinbase from continuing to innovate, launch new products, and expand internationally.
Looking ahead, investors will want to see a business that can consistently register profits, regardless of the macroeconomic and industry conditions.
3. The stock is still a bet on rising crypto prices
At a high level, I think it's reasonable to think that Coinbase's ultimate success will depend entirely on the direction of the cryptocurrency market. If capital continues flowing in and crypto asset prices rise, then the company can attract more users who transact and use the services more frequently. Coinbase can then monetize all of this activity.
This means shareholders have to be ready for the ongoing volatility of Coinbase's financials. The cryptocurrency market will continue to experience wild boom-and-bust cycles for the foreseeable future. As a result, this business will keep posting unpredictable results.
For those investors who accept this situation, it's critical to maintain a very long-term mindset to wait for things to play out and for the industry to evolve. At the end of the day, owning Coinbase shares means betting on the growth of the crypto industry, which is still uncertain.
