Summary We've maintained a 'Buy' rating on Coinbase stock since early 2023 due to its successful transition to a services-based model, yielding stable revenues and growth. Recent financials show strong top-line results driven by increased interest in crypto and organic IRR, with services revenue growing 80% YoY. COIN's valuation has become attractive again, trading at 6.4x sales, making it a compelling buy after a recent dip. We're re-iterating our 'Buy' rating on COIN. Over the last 18 months or so, we've put out a number of bullish articles about Coinbase ( COIN ), the leading regulated crypto exchange in the United States. Here are some links to this research, if you'd like to have a gander: Coinbase: Diversifying Revenue, Cutting Costs, And Well Positioned For The Next Bull Market Coinbase: Very, Very, Very Promising Coinbase: All Signs Point To Further Gains (Technical Analysis) Since the very start of our coverage, we've maintained a 'Buy' rating on COIN, and from our first rating through today, investors have been treated to more than +190% in total returns, vs. a ~38.5% return for the S&P 500 in that same span: Seeking Alpha Talk about alpha! The core of our thesis has historically centered around our belief that the crypto exchange was successfully transitioning away from transaction -based model and towards a services -based model which would come with more stable revenues, solid new avenues for growth, and a higher multiple. As the company's revenue has diversified, swings in the underlying crypto market have proven easier to navigate, and the multiple has grown, mostly according to our expectations. Looking forward, our bullish thesis remains centered on two things - COIN's continued success with a services-based model, and the valuation, which has once again become attractive. We avoided talking about the stock for the last 8 months or so as a result of the company's extended valuation, but today, given the dip, COIN looks well priced vs. future expectations, and we're once again re-iterating our 'Buy' rating. In this article, we'll explore fundamental updates with COIN (since we last covered those), and explain why we're still bullish on the stock. Sound good? Let's dive in. COIN's Financials Since we last covered COIN on a fundamental basis, the company has reported earnings 3 times, in February , May , and August . Each of these reports saw strong generally results, although the Q2 report did miss on EPS by a little bit: Seeking Alpha These results - particularly the top line growth - were largely driven by a boost in underlying crypto sentiment, which caused a massive spike in transaction-based revenue. You can see this increase below, particularly in Q1 of this year, with transaction revenue surging more than 100% QoQ from Q4: IR This increase in revenue is linear to the degree that it can be plotted on a graph. Below, you can see how higher prices, and higher volumes at higher prices, especially at the start of 2024, drove big revenues for COIN: TradingView This chart is only of BTC, but similar charts exist for ETH, SOL, etc. Clearly, some of COIN's revenue is still directly correlated with crypto prices and market interest. However, these charts have come off a bit in terms of both price and volume, which is primarily why the stock has fallen 100 points from the $270 region to the $170 region over the last few months: TradingView This leads us to the growth in services. Dig into the table above, and you'll notice how much COIN's additional lines of business have increased and stabilized since we first highlighted them early last year. In Q2, from a YoY standpoint, stablecoin revenue has grown from $150 million to $240 million in pretty much a straight line. Similarly, blockchain rewards, subscription fees, interest, and custodian fees have also increased without much volatility, due to increasing platform utilization, as well as a mix of higher takes, models, and crypto prices. Together, COIN's services revenues have grown from $335 million per quarter (in Q2 2023) to ~$600 million per quarter (at present) . This represents YoY growth of roughly 80%. Again, some of this is due to higher crypto prices, but much of this increase is also driven by a stronger business focus and organic IRR within segments. To some extent, a bet on COIN will always be a bet on the future of crypto, but these quarterly service revenue figures from COIN are starting to pile up. Finally , if we're looking at COIN from a profitability standpoint, the company has done a decent job of controlling spend in the face of 80% YoY services and 100%+ transaction revenue growth: IR Sure, spend has increased roughly 41% after a brutal round of cuts in 2022, but we see this as reasonable re-investment into the company in order to grow the business further. Plus, on a cash basis, the company just reported two strong quarters of $400 million+ CFO, so it's not like COIN is hurting for bottom line profitability: Seeking Alpha Net income numbers are hampered somewhat by the more than $200 million per quarter in SBC, but given growth of COIN's services businesses, we're willing to overlook this as a negative for the time being. COIN's Valuation Our view on the fundamentals is well established at this point, and we're happy to see the company continue growing recurring revenues alongside the recent burst in transaction business. The barbell approach is working, and we think COIN is well positioned to grow into the definitive 'all in one' bridge to the crypto economy. However, the reason we're excited about the stock as of late is actually due to the valuation. The price you pay for good assets matters , and for the longest time this year, COIN's price was simply too expensive from a long-term allocation standpoint: TradingView The chart above is of COIN's Price / Sales ratio, which has been quite volatile since IPO in 2021. As you can see, COIN's sales multiple increased early in the year to around 16x sales (very high) as transaction revenue was exploding. However, as COIN has reported results, the stock has coincidentally come in somewhat. This has created a reasonable looking multiple for a long-term entry. In November 2023, we argued that COIN was a long based on the potential of the high-margin services businesses, alongside a 6x sales multiple . Since then, the stock is up 93%, but the stock is still trading at 6.4x sales . To us, given that COIN management have demonstrated - concretely , through results - that the combined transaction/services approach can produce more stable financials and better margin, we think that re-entering the stock at a similar multiple to a year ago appears to be a solid move. The capital appreciation COIN has experienced, in combination with the similar multiple, also does a good job of showing just how much the organic business has grown in a short span. Between the financials and the valuation, we think buying the recent dip in COIN's stock appears to be an appealing way to allocate capital in today's market. Risks There are, of course, risks to this thesis. First off , regulatory hurdles remain. The SEC has been famously uncooperative to the crypto space as a whole, but the recent Chevron supreme court ruling should help out the industry, as it allows government agencies less room for interpretation of the law. In theory, this should produce a more consistent regulatory regime for Crypto. Thus, while COIN is still on the backfoot vs. the U.S. government in terms of 'power', we're hopeful that things will improve in the coming years. Secondly , the crypto space remains volatile, and to some degree, all of COIN's revenues are tied to the success of the space. Management has done a good job of reducing the reliance on transactions to keep the business viable, which reduces the amplitude of earnings volatility somewhat, but if interest in crypto dies down, secularly, over the long term, then it's tough to see how COIN could appreciate from here. In fact, in that scenario, the company is likely in a LOT of trouble. Thankfully, we don't see that happening. Finally , there's always a risk that getting in at 6.4x sales is a bit expensive. The multiple has decreased to 1-2x in the worst bear markets in the past, and the same could happen in the future, even given COIN's improved profitability & stability profile. Summary That said, we're long-term bulls in COIN. Interest in crypto remains high, regulatory risks seem to be subsiding, and recent results show concrete proof that COIN's focus on services is powering results. 6.4x sales might be a bit expensive in the event that a crypto bear market is around the corner, but taken together, especially as the Fed begins cutting rates, we think that buying the recent dip in the stock is the best course of action. Thus, we're re-iterating our 'Buy' rating on COIN. Cheers!
