Coinbase (NASDAQ:COIN), one of many largest cryptocurrency exchanges on the planet, took buyers on a wild experience after its direct itemizing final April. It went public with a reference value of $250, hit its all-time excessive of $429.54 on the primary buying and selling day, and ultimately closed at $328.28 per share.
As we speak, Coinbase trades within the mid-$230s. The market’s preliminary enthusiasm fizzled out as Bitcoin‘s (CRYPTO:BTC) good points stalled, different speculative cryptocurrencies misplaced their momentum, and a rising variety of regulatory threats solid darkish clouds over the nascent business.
However have buyers grow to be too bearish on this high-growth cryptocurrency inventory? Let’s examine the bear and bull instances to search out out.
What the bears will inform you about Coinbase
The bears dislike Coinbase for 3 important causes: its unpredictable progress, the regulatory threats, and the aggressive challenges.
Coinbase’s progress charges are actually beautiful. Its income surged 144% to $1.28 billion in 2020, then soared 671% yr over yr to $5.34 billion within the first 9 months of 2021. It generated a internet revenue of $322 million in 2020, and that determine jumped to $2.78 billion within the first 9 months of 2021.
Nonetheless, Coinbase generates almost all of its income from cryptocurrency trades, and its progress is pegged to the market’s fickle curiosity in Bitcoin, Ethereum (CRYPTO:ETH), Dogecoin (CRYPTO:DOGE), and different main cryptocurrencies. Over the previous three months, the market’s urge for food for these cryptocurrencies considerably waned as rising inflation and rates of interest induced buyers to dump extra speculative investments.
That sell-off countered the notion that Bitcoin and different cryptocurrencies have been efficient hedges towards inflation. It additionally induced Coinbase’s buying and selling quantity and month-to-month transacting customers (MTUs) to say no sequentially within the third quarter. Coinbase stated crypto market situations “improved meaningfully” within the fourth quarter, however we cannot know if it truly stopped that bleeding till it posts its fourth-quarter earnings report in early February.
That slowdown makes it troublesome to place a lot religion into analysts’ forecasts for Coinbase. For the time being, they anticipate its income to rise 467% in 2021 and decline 2% towards robust comparisons in 2022, however these estimates might be rendered out of date by a sudden spike or plunge in crypto costs.
In the meantime, regulators are tightening the screws on the crypto market. Final September, the Securities and Alternate Fee (SEC) compelled Coinbase to cancel Lend, a deliberate characteristic that might have enabled its customers to lend out their USD Cash (a stablecoin tethered to the U.S. greenback) for curiosity. The SEC can be extensively anticipated to roll out new rules for cryptocurrencies, crypto exchanges, and crypto mining firms within the close to future.
These tighter rules might cut back cryptocurrency costs, cripple a few of Coinbase’s options, or drive it to extend its working bills. To make issues worse, a rising variety of rivals — together with Block‘s (NYSE:SQ) Money App and Robinhood Markets (NASDAQ:HOOD) — might lure away extra cryptocurrency merchants because the market stagnates or shrinks.
What the bulls will inform you about Coinbase
The bulls typically like Coinbase for 3 causes: the long-term progress potential of the cryptocurrency market, the growth of its ecosystem past retail cryptocurrency trades, and its surprisingly low valuations.
For instance, ARK Make investments’s Cathie Wooden — who holds Coinbase as a prime funding in three of her flagship ETFs — believes Bitcoin’s value will surge from about $40,000 as we speak to over $560,000 by 2026. If that really occurs, Coinbase might generate multibagger good points over the following few years.
Coinbase can be progressively diversifying its enterprise with subscriptions (for commission-free trades, prioritized buyer help, and account safety for as much as $1 million), new blockchain-based reward packages, an upcoming NFT marketplace, and different decentralized finance merchandise. That growth might diversify its income streams and lock in additional customers.
Coinbase’s inventory at present trades at 29 occasions ahead earnings and fewer than seven occasions subsequent yr’s gross sales. These valuations are low relative to its progress, however additionally they replicate the market’s trepidation about its future. However for those who’re bullish on the long-term progress of the cryptocurrency, blockchain, NFT, and DeFi markets, it is likely to be the perfect time to put money into Coinbase.
Which argument makes extra sense?
Coinbase will seemingly continue to grow, however I imagine there are higher crypto funding choices on the market for aggressive and conservative buyers.
Aggressive buyers is likely to be higher off buying cryptocurrencies directly, which might generate larger good points with out the burden of Coinbase’s working bills. Extra conservative buyers ought to merely follow higher diversified firms like Block, which has loads of publicity to Bitcoin however is not an all-in play on the cryptocurrency market like Coinbase.
So whereas I like Coinbase as an organization, I would not put money into it proper now. The market will seemingly proceed to categorize it as a riskier progress inventory this yr — and that label might harm its progress as rates of interest progressively rise.
This text represents the opinion of the author, who could disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all suppose critically about investing and make choices that assist us grow to be smarter, happier, and richer.