Should you buy Coinbase stock? March 2023

Bullish Studio

For the entire 2022, the company had an operating loss of over $2.7 billion. For comparison, in 2021, the company managed to bring in more than $3 billion in operating profit.  This means the entire future of the company is dependent on how the cryptocurrencies are priced. The company has cash of over $4.4 billion with almost $3.4 billion in long-term debt. With the current liquidity, it is very difficult for the company to survive. Not only that, but there’s not much the management can do as they cannot (legally) influence the prices of cryptocurrencies.  The recent scandals, especially FTX, do not help the company at all as the trust in the crypto exchanges has significantly decreased.  The only action that the management can take is to reduce the operating expenses. In order to break even, they need to be halved!  This begs the question, is Coinbase worth the $15 billion market cap? This answer is difficult to answer as Coinbase cannot be valued using any traditional valuation model. Its valuation is dependent on the prices of the cryptocurrencies. If the prices of cryptocurrencies remain at this level, Coinbase could be bankrupt in less than 2 years.  How is investing in Coinbase different than investing in Bitcoin? At this moment, it isn’t significantly different. Coinbase could be seen as a diversified bet on cryptocurrencies as its transaction fees come from all of the cryptocurrencies, not only Bitcoin.

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00:00 Should you buy Coinbase stock? Coinbase is one of the few crypto exchanges that hasn't

00:05 faced a scandal but its share price has been volatile and is now down more than 80% since

00:10 its IPO. Right now the company has a market cap of $15 billion. With $4.4 billion in cash

00:16 and $3.4 billion in long term debt, the enterprise value is roughly $14 billion. Revenue over

00:23 the last 12 months is $3.2 billion but net income is -$2.6 billion.

00:29 What's interesting is that the share price of Coinbase has an incredibly high correlation

00:33 with the price of Bitcoin at over 90%. But crypto has been hit by numerous scandals and

00:39 demand has suffered from a higher interest rate environment.

00:43 As the price of Bitcoin has fallen from $60,000 in 2021 to $23,000 in 2023, so has the revenue

00:50 that Coinbase generates from transaction fees. Last year's revenue of $3.2 billion represents

00:56 more than a 50% decrease year over year. As noted by Wasteland Capital, it's truly ironic

01:02 that Coin's second largest revenue line now comes from the interest earned from depositing

01:06 customers' cash in US treasuries. Even so, the company is burning cash. Net

01:11 income has fallen from more than $3 billion in 2021 to -$2.6 billion in 2022.

01:19 So Coinbase is in a tricky spot. It has no control over crypto prices and to break even

01:24 it would need to cut operating expenses in half.

01:27 Meanwhile, recent scandals have provided regulators with the opportunity to ramp up their crackdown

01:32 on the entire market. Staking products may be next in line after the SEC went after fellow

01:38 crypto exchange Kraken. Overall, investing in Coinbase remains a

01:42 bet on the performance of Bitcoin and other cryptocurrencies. But a market cap of $15

01:47 billion with billions of losses makes Coinbase an expensive bet. And the kicker is that stock

01:53 based compensation at Coinbase incredibly increased by 90% in 2022. At $1.57 billion

02:00 stock based compensation represents 50% of annual revenue.

02:05 It's possible the crypto market peaked in 2021 and that's going to make it hard for

02:09 Coinbase to recover. That's why I give the stock a bearish rating. But these are my personal

02:13 opinions not financial advice and I've got no position in Coinbase stock.

02:18 For more detailed investing ideas visit our website overlookedalpha.com

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