Coinbase Earnings: Crypto Boom Powers Return to Profit

We are increasing our fair value estimate for Coinbase stock to US$110 from US$100.

Michael Miller 16 February, 2024 | 1:58PM
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Key Morningstar Metrics for Coinbase


What We Thought of Coinbase’s Earnings

No-moat-rated Coinbase COIN reported strong fourth-quarter results as a surge in cryptocurrency prices and volatility drove a sharp recovery in the company’s trading revenue. Revenue increased 38% from last year and 42.5% from the previous quarter to $953 million. Meanwhile, Coinbase returned to GAAP profitability with diluted earnings per share of $1.04, though the company did benefit from a $171 million tax benefit during the quarter. Strong trading volume did not surprise us, as Coinbase’s trading volume data was readily available throughout the quarter. However, the firm’s average pricing was more resilient than we had expected as more of its increased volume came from retail traders, who pay higher fees than institutional traders than we had anticipated. As we incorporate these results, we are increasing our fair value estimate for Coinbase to US$110 from $100. Of the increase, $8 comes from higher trading revenue as we adjust both our near-term pricing and volume projections higher. The remaining $2 of the positive adjustment comes from higher interest income expectations from USDC as the stablecoin appears to be on better footing, with its market capitalization beginning to rise again in early 2024.

Despite the increase in our fair value estimate, we still see Coinbase as overvalued and recommend that investors wait for better risk/return dynamics. Coinbase’s trading revenue, its largest source of revenue, increased 64% from last year and 83% sequentially to $529.3 million. The main driver of improved results was higher retail trading volume and strong average pricing. Total trading volume was up only 6.2% from last year to $154 billion, while retail trading volume increased a far more impressive 45%. Coinbase’s retail users pay much higher average fees than its institutional clients, 1.7% of total trading volume versus 0.03%, so having more of its volume growth come from these retail clients is a significant positive for the company’s results.

Beyond transaction revenue, Coinbase’s subscription and service revenue also had strong trends during the quarter, with total revenue increasing 32.7% to $375.4 million. The largest recurring revenue for Coinbase is still interest income from its participation in USDC, which increased 17.8% from last year to $171.6 million. USDC is a cryptocurrency pegged to the U.S. dollar and backed by reserves that clients give to Coinbase and Circle in exchange for newly created USDC. Coinbase and Circle generate interest income on these reserves and split it on a pro rata basis, making Coinbase a direct beneficiary of higher interest rates. That said, the benefit of rising interest rates was partially offset throughout much of 2023 by declining USDC market capitalization following the failure of Silicon Valley Bank. Some of USDC’s reserves were held at the bank during the crisis, causing a run on USDC that led it to break its peg to the U.S. dollar temporarily. While no reserves were ever lost, these events did lead to a significant amount of client collateral being removed over time. As a result, the amount of USDC outstanding fell from $43 billion at the start of March to below $25 billion by the end of December. Fortunately for Coinbase, after several quarters of outflows, USDC has finally stabilized, with the program seeing inflows in early 2024. While USDC has lost considerable market share to its main rival, Tether, this stabilization should put the program on better footing for 2024.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Coinbase Global Inc Ordinary Shares - Class A211.01 USD-3.24Rating

About Author

Michael Miller  is an equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

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