GCR

Investment Overview

Coinbase Global (NASDAQ:COIN) had a euphoric listing last year in the United States stock exchange. On listing, COIN stock traded at highs of $430.

However, the initial optimism in the markets failed to sustain and Coinbase stock started trending lower. There were two primary reasons for the downside.

First and foremost, the listing valuation looked stretched and investors booked profits.

Furthermore, Bitcoin witnessed some correction along with relatively lower trading in meme coins.

With Bitcoin sliding below $40,000 in January 2022, Coinbase stock declined further. Currently, the stock trades near $200 levels.

With a meaningful correction from highs, Coinbase stock is trading at a forward price-to-earnings-ratio of 13.5. Valuation looks attractive and I believe that Coinbase has the potential to create long-term value for investors.

Let’s look at some of the key factors to be bullish.

Cryptocurrency Still at an Early Adoption Stage

The trend in global crypto adoption has remained encouraging. According to data from Crypto.com, the total number of crypto users globally were 106 million in January 2021.

However, the number of users surged to 295 million by December 2021. This implied a 178% growth over a 12-month period. As the chart below shows, crypto adoption has been steady in the last few quarters.

The January 2022 report from Crypto.com has some more encouraging estimates. The report predicts that the number of crypto users will reach one billion by December 2022.

If this estimate holds true, it’s good new for Bitcoin, altcoins and cryptocurrency exchanges. Wider adoption would imply higher trading volume.

Another interesting chart below compares crypto adoption with the rise of internet in the 1990s. There is a long way to go and with emerging use cases, the cryptocurrency world is positioned to survive.

Of course, not all coins or tokens will survive in the next five-years. However, the current boom in the number of listed coins/tokens is setting stage for wider adoption and long-term survival.

Coinbase is Growing at a Stellar Pace

It’s worth noting that even as the stock price has declined since listing, Coinbase has been reporting stellar growth numbers.

For the third quarter of 2021 (last reported results), Coinbase reported revenue of $1,235 million. On a year-on-year basis, the company’s revenue growth was 330%.

Additionally, for the same period, Coinbase reported EBITDA of $618 million. On a year-on-year basis, EBITDA growth was 402%.

Of course, sustaining this kind of growth is unlikely. However, Coinbase is positioned for healthy revenue and cash flow growth considering the following factors.

First, wider crypto adoption would imply higher number of users. For Q3 2020, the company had 2.1 million transacting users. For Q3 2021, the number of transacting users increased to 7.4 million. This positive trend is likely to sustain.

Second, as of September 2021, Coinbase reported cash and equivalents of $6.4 billion. Further, for the first nine months of 2021, the company reported operating cash flows (excluding custodial funds due to customers) of $2.8 billion. Coinbase therefore has a robust cash buffer. This is likely to be utilized for aggressive product development and expansion.

Third, the institutional adoption of crypto has been accelerating. For Q3 2020, institutional trading volume on Coinbase was $27 billion. However, trading volume in Q3 2021, surged to $234 billion. As more institutional investors look to create a diversified portfolio, Coinbase stands to benefit.

Fourth, Coinbase has been increasing the number of assets available for trading and custody. For Q3 2021, the company added 30 new assets for trading and 19 new assets for custody. As the chart below shows, the number of assets has been increasing on a steady basis. This is likely to attract more users towards the trading platform.

In addition to these factors, Coinbase has already initiated international expansion plans. The company is looking for inroads in markets like Japan and India, among others. Geographical expansion is another factor that will boost growth. With the company having strong financial flexibility, aggressive entry into multiple new markets is likely.

Concluding Views

Coinbase has already been generating robust cash flows. As trading volumes increase and subscription revenue swells, further cash flow upside seems likely. Over the next few years, the company promises to be a cash flow machine.

Further, it seems very likely that major economies will regulate cryptocurrency than ban Bitcoin and other coins/tokens. As an example, India has imposed a 30% tax on crypto profits. Coinbase is unlikely to face major regulatory headwinds.

With these factors in consideration, Coinbase looks attractive after a deep correction. It seems probable that Coinbase stock will be a value creator in the next few years. Importantly, the worst of the downside in the stock seems to be over.