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Coinbase Gets Rocked - Risk/Reward Doesn't Get Much Better Than This

1 Peter Chapter 1 verse 13 states, "Therefore, with minds that are alert and fully sober, set your hope on the grace to be brought to you when Jesus Christ is revealed at his coming."


There are many verses in the Bible like this one that call Christians to be alert and sober. This is meant to instruct on diligence in being prepared. For the Christian, the expectation is that Jesus Christ will return, but there will also be many people and events that attempt to thwart and confuse this truth. Being prepared takes constant attention and dedication daily to grow.


This is a connection that is clearly in-line with investing principles. But for many retail investors, it's pretty hard to continue to take part in the market daily, especially when volatility turns extreme. For me, it's simply the grind. Keeping tabs daily is a must as every daily flow of information is pertinent to the unfolding of the investment thesis and accompanying narratives.


Topic

Coinbase Global, Inc. (COIN) was down 26% today, and is down 85% from the past year's peak. What's the term for that? Correction, recession, I like annihilation. COIN, like many newer competitors attempting to dethrone legacy stalwarts finds itself in a unique position. COIN did $534 million in Revenue in 2019 and quickly ascended to $7.8 billion in 2021. The anticipated drop for 2022 in Revenue is still going to afford a 10-times trend from 2019 by 2022, that will be poised to re-accelerate through the mid-term.


Key Takeaways


The key takeaways for COIN relate mostly to the company's core metrics and their impact on the fundamentals.

  • MTUs declined from 11.4 million at 2021 year-end to 9.2 million

  • ATRPU dropped from $64 at 2021 year-end to $55

  • Total Transaction Revenue dropped as a result of MTUs and ATRPU results from $6.8 billion at 2021 year-end to $6.3 billion.

  • Net Cash stood at $3.6 billion

  • GM contracted from 83.8% at 2021 year-end to 81.8%

  • Adjusted FCF Margin contracted from 50% at 2021 year-end to 36%

Other important factors relate to the company's wide range of guidance. If Wallstreet was expecting to see a tighter range of estimates by COIN, they were left hanging. What we know is that COIN expects MTUs and ATRPU to continue to contract during Q2 2022, with ATRPU clearly on a trajectory towards pre-2021 levels. MTUs are guided to range from 5-15 million.

Lastly, COIN continues to see robust growth in its Subscription & Services Revenue, led primarily by Blockchain Rewards, Other Subscription & Services Revenue, Interest Income, and Custodial Fee Revenue. COIN's future is not going to continue to be dominated by transaction-based revenue. The company has established its pillars of growth, which also include financial systems and app platforms for Crypto. DeFi and NFTs are new mechanisms that have vast potential as well. I don't believe that Cryptos will ultimately be commoditized in the same way that equities have been.


Why it Matters

As I stated above, COIN's Revenue has skyrocketed in a matter of years. Based on the company's guidance and performance during Q1 2022, I would not be surprised to see Revenue finish around $5.3 billion or so for all of 2022. This seems like a steep drop from 2021's nearly $8 billion, but the reality is it is still 10-times higher than 2019 results. The mid- and long-term potential is far to substantial to assume that re-acceleration will not occur.


For 2021, investors got a snapshot of how truly strong COIN's business model is as a Cash generator. As the company goes through some growing pains the market has simply figured that COIN's exposure to Crypto and transactional Revenue are cause for suppressing valuation until proven otherwise.


COIN is trading 1.6 times EV/Sales based on 2022 expected results. The market is currently treating COIN like a cyclical commodity-based company, when in fact COIN is a major leading Fintech innovator. COIN is a prime example of a company that benefitted from the increased Crypto trading frenzy, but Cryptos aren't going away anytime soon. In fact, the opposite is the case. The market's substantially discounted miss-pricing affords investors a lucrative risk/reward opportunity.






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