Coinbase: Earnings Beat, But Stock Falls?

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Coinbase (COIN) is down nearly 4% today after reporting fourth quarter earnings after the bell yesterday that beat Wall Street expectations. The company warned Q1 numbers may be lower due to weakness in the crypto markets. Our crypto coverage analyst, Jake H, went through the earnings report. Read his notes below.


Key Takeaways

See the earnings release here and the shareholder letter here. The earnings call transcript is here.

  • Revenue was $2,490M beating 1,912M exp.
  • Diluted EPS was $3.32 beating $1.85 exp.
  • Guidance is expected to be lower than Q1 numbers due to weakness in the crypto markets.

Company Overview

  • Coinbase Global, Inc. (COIN) is a financial technology company that provides end-to-end financial infrastructure and technology. It is primarily focused on building cryptoeconomy, a transparent financial system enabled by crypto that leverages crypto assets, a digital asset that is built using blockchain technology. Its platform enables approximately 43 million retail users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries to participate in the cryptoeconomy.
    • For retail users it offers primary financial account to invest, store, spend, earn and use crypto assets.      
    • For institutional users it offers a one-stop shop for hedge funds, money managers and corporations for accessing crypto markets through advanced trading and custody technology.
    • For developers, merchants, and asset issuers the company provides with technology and services that enables them to build applications that leverage crypto protocols, participate in crypto networks and securely accept cryptocurrencies as a payment.

Q4 Earnings Highlights

Key Metrics

  • Retail Monthly Transacting Users (MTUs) were 11.4 million up 54% from Q3
    • 32% of MTUs were using both investing and non-investing products
  • Institutions beyond asset managers continued to increase usage on the platform such as financial services firms, corporate treasuries, and institutional allocators.
    • Anheuser-Busch, Brex Enfusion, and Franklin Templeton
  • Assets and Trading Pairs
    • Added 14 custody and 36 trading assets.
    • Plan to continue to add all legal crypto assets.  
  • Coinbase Wallet
    • Users can trade more than 5,500 crypto assets.
    • Users can interact with Coinbase Wallet via the mobile app and browser extension.
  • Coinbase Payroll
    • Users can now receive a percentage of their compensation in crypto, this is available to all user in the U.S. with plans for international customers.
  • Tax Center
    • Helps user simplify crypto tax filing, provides reports, information, and education. Taxpayers can now also receive tax refunds in crypto or USDC when they file with TurboTax.

Financials

  • Revenue was $2,490M vs. 1,912M exp.
  • Net income was $840M
  • Adjusted EBITDA of $1.2B
  • Diluted EPS was $3.32 vs. $1.85 exp.
  • Assets were up to $278 billion up from $255 billion in Q3.
    • Representing 11.5% of the total crypto market declining 12.2% QoQ, citing market fluctuations.

Guidance

  • Q1 2022
    • With crypto asset volatility down 10% and crypto market cap down over 20%, Coinbase cited that retail MTU, trading volume, and subscription/services revenue will be lower in Q1.

Management Commentary

Brian Armstrong, Co-Founder + CEO

  • On a possible crypto winter…
    • “I don’t think we’re entering a crypto winter. In fact, we don’t really think about it like that anymore. I think early on in crypto’s history, there was this trend of going through, summers and winters. And the thing is crypto is kind of working now. And so I don’t expect it to be anything quite that pronounced over time. I think, we basically have no idea what’s going to happen in the next quarter or the next couple quarters. And at any moment in our history with crypto, it’s like trying to predict what’s the S&P 500 going to be next quarter or something like that.”
  • On investing strategy going forward…
    • “So looking ahead for 2022, the opportunity is just as big, if not bigger, I think we’re continuing to invest in our suite of products. So, we’re a multi-product company. We do a 70, 20, 10 resource allocation with 70% on our core, 20% on these strategic bets, and 10% on these venture bets, and kind of bigger moonshot efforts or more ambitious moonshot efforts. And so building that, that suite of products and thinking about how they can all be tied together is really powerful.”
  • On stock price/valuation…
    • “I have to scratch my head a little bit looking at some of the revenue multiples, and I think we’re very bullish about the future. I think it’s really rare to see a company that has high growth profitability and a massive TAM in front of it. That’s kind of the trifecta and its really hard for me to imagine an industry that has more growth potential in front of it. If I look at the next decade. And so I look, I think a lot of this is just human psychology. I think even just a few months ago, there was people, I saw lamenting like, oh, I wish I had bought crypto sooner or COIN stock sooner and they didn’t think they would ever get a chance to buy something like at these prices again.”

Alesia Haas, CFO

  • On guidance…
    • “So, we noted in our letter that Q1 is trending software in Q4, and this is driven by lower crypto asset prices and lower volatility than we saw last quarter. Both of which are significantly correlated with our monthly transacting users and our trading volumes. Quarter-to-date, our retail MTUs have averaged roughly $10 million. On our trading volume quarter-to-date we’ve seen approximately $200 billion. And so we expect Q1 to have lower MTUs and lower trading volume than Q4 of 2021.”
  • On possibly turning unprofitable…
    • 2022 is an investment year. As we shared in our outlook, it’s too early to call with precision where we think the revenue or the MTUs of 2022 will land, which is why we gave a range of $5 million to $15 million. As I said in my earlier remarks before in the midpoint or the high end of that range, we’ll continue be profitable, but then a scenario where we’re the low end of that range, that we are prepared to generate to drive a loss of up to $500 million loss and adjusted EBITDA.”
  • On NFT’s affecting revenues…
    • “And I think that these we’re excited about the potential of NFTs and derivatives. These are going to take a while to get right into the add meaningfully to our revenue. There could be some surprises, quite candidly, but I want to be more cautious. And when we see that coming into our revenue this year.”

Valuation + Analysis

  • Coinbase currently trades of 12x 2022 EBITDA. Our price target of $225 is based on a DCF with a 5% terminal growth rate and 8% discount rate putting it at 25.2x 2025 EBITDA.

JH: Coinbase is firing on all cylinders. Management continues to execute and invest in new innovative products to diversify revenues. Management has acknowledged their revenue pegging to the number of users transacting and has plans to slow down investments should MTUs and AVRPUs fall below expectations. One of the biggest risks is a decline in crypto markets causing unprofitable quarters at Coinbase. Regardless, this is a great way to gain exposure to the crypto industry without owning the asset itself and we remain very bullish on the future of Coinbase as they expand into derivatives trading, layer 2s, an NFT platform, and new subscriptions just to name a few.

Upside Risk:

  • Higher than expected trading volume on the platform.
  • Higher than expected Average Revenue Per User.
  • Faster than expected revenue diversification.
  • Crypto friendly regulations imposed by governments.

Downside Risk:

  • Lower than expected trading volume on the platform.
  • Inability to diversify revenue from transaction based.
  • Tighter than expected regulations imposed on crypto and/or the brokerage.
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