Coinbase Global Drops 19% Post Earnings - What to Make of It

You are my hiding place and my shield; I hope in Your word.

Psalm 119:114

God’s word is powerful and impactful as it transcends all of humanity. Hope in God’s word is not wishful thinking, but eternally relevant. Humanity without God is lost and the evils of this world are expressed through a separation from Him. As a Christian, rather than attempt to try to use my own personal rationale to discern the ways of the world, it is best to simply acknowledge God’s perfect word as the key source of truth.

As an investor over the past 25 years, there have been plenty of times where it has felt like a hiding place was necessary to shelter me from disappointment. God’s word inspiring hope is applicable to all things and His hiding place is not a place to shield fear, but a place to encourage and strengthen resolve. This is the mindset necessary to deal with life’s struggles and challenges, including those associated with investing.

Coinbase Global (COIN)

COIN, like other fintech peers, was having a very strong performing year until its earnings report last week.  Since then, the company’s stock price has dropped approximately 19%. During this time, analysts have already weighed in negatively, and the company has issued a debt raise. The key is how investors should be thinking about the future.

What are the key takeaways from the earnings report?

Fundamentally, it was a rough quarter for COIN. Revenue was paltry over the past year stemming from mixed results.  Transaction revenue was down sharply from the prior quarter versus subscription and services revenue underperforming as well, only being propelled by USDC revenue. COIN’s operating cash flow, or OCF, dropped significantly with the margin falling below the 30% level for the LTM period and reflecting only 4% for the quarter.

COIN’s transactional performance mirrored the broader downturn in Cryptocurrencies during the quarter. Other peers like Robinhood Markets, Inc. (HOOD) have witnessed similar results, although HOOD has masked the downturn through acquisitions.

Management continues to focus on core areas including their phased approach to building the financial system onchain, and continued progress in policy and regulatory clarity. Crypto as an investment, financial service, and app platform all have substantial potential and COIN continues to be in the very early stages of multiple products and services within these core areas.

What do we make of analyst downgrades/negative sentiment and the debt raise?

Investment firms were quick to take a negative approach to COIN’s results with Compass Point leading the charge, downgrading to sell. Analyst perspectives were predominantly focused on a distaste for COIN’s sole exposure to Cryptocurrencies with some touting HOOD as a better investment option through a more diversified approach. COIN has been considering tokenized equities that could diversify its business services, but COIN will continue to be a digitally structured company committed to the digital future of the world. I find the criticism of COIN’s Cryptocurrency based approach flawed as COIN’s focus is to fundamentally shift global economies. As mentioned, COIN is on the cusp of many new endeavors for its playbook and firms piling on during this early stage is a routine strategy to take advantage of an opportunity of perceived weakness.

Soon after COIN’s downgrade, the company announced a debt offering for convertible notes. This news temporarily dropped the stock price below the $300 level which is a typical response from the stock market for debt raises. COIN’s expected use of these funds range from capped-call payments to debt replacement, to usual operating capital, acquisition considerations, etc. Investors should scrutinize COIN’s OCF performance against how this new capital is allocated over time.

How is the long-term thesis impacted if at all?

Based on COIN’s results, the flurry of chatter from Wallstreet and investment communities, and the debt raise, there is no break in the company’s mid- and long-term potential. Much of the Cryptocurrency markets are still influenced mostly by the investment angle, as financial services and app ecosystems are still in infancy. COIN currently is discounted modestly to other peers like HOOD and for the time being, HOOD’s faster revenue growth has investors more enamored. COIN’s sustained upside potential is cause for the stock price’s dip below $300 being short-lived, however, things could remain somewhat choppy in the short-term.

What are the next prudent steps for investors?

Buying around the $300 level is not a bad price to initiate or accumulate shares in COIN. While the numbers weren’t exciting during a challenging quarter, the company is poised to continue to build towards each step of its core focus. The current Administration also serves as a sustained catalyst for further policy and regulatory clarity towards Cryptocurrencies. I remain bullish on COIN over time but based on the extreme performance of the stock market and significant overvaluation associated with it, investors should exercise some caution as a broader market pullback may offer a lower entry point.