Regulatory Clarity May Expand Crypto Market, But Volatility And Competition Could Impact Future Earnings

Key Takeaways

• Regulatory clarity and global acceptance of crypto could expand Coinbase's market, driving potential revenue growth.
  
• Diversifying revenue through subscriptions and services could enhance earnings stability and reduce reliance on crypto transactions.
  
• High crypto market volatility and competition from low-cost platforms could pressure Coinbase's margins and market share, affecting profitability and revenue.

Catalysts

Operates platform for crypto assets in the United States and internationally.

• Increased regulatory clarity in the U.S. and global pressure to embrace crypto adoption can significantly expand Coinbase's total addressable market, potentially driving higher future revenues.
  
• The strategic focus on new revenue streams from subscription and services, which grew 64% year-over-year, could increase overall revenue diversification and contribute to higher earnings stability over time.
  
• Plans to expand international market presence by leveraging a proven playbook for achieving contribution margin positive in new markets should enhance revenue growth and improve net margins through scale.
  
• The aim to make USDC the #1 dollar stable coin, along with the integration of stablecoin payments and partnerships, could boost future earnings and stabilize revenue through increased transaction volumes and new use cases.
  
• Expansion into derivatives trading and ongoing asset addition in a more favorable regulatory environment could drive substantial revenue increases from both advanced traders and institutional clients, boosting overall earnings.

Coinbase Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coinbase Global's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.0% today to 24.2% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $7.91) by about March 2028, down from $2.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.5 billion in earnings, and the most bearish expecting $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.3x on those 2028 earnings, up from 17.8x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 3.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Coinbase Global Future Earnings Per Share Growth

Risks

• High volatility in the crypto market and unpredictable price movements, as described in February's liquidation event, may dissuade retail investors from trading, impacting revenue generated from transaction volumes.
  
• The competitive landscape with lower-cost trading platforms and all-in-one financial services integrated with crypto could pressure Coinbase’s margins and market share, affecting revenue and net margins.
  
• Regulatory changes and uncertainties, despite being largely positive, could pose risks if they do not resolve critical issues like market structure or token classification, potentially impacting earnings and operational costs.
  
• The decreasing profitability in the derivatives market, which has lower fees compared to spot trading, might pressure profitability as Coinbase focuses on growing trading volume and liquidity in that segment.
  
• Variability in macroeconomic factors like interest rates could negatively impact subscription and services revenue, such as stablecoin revenues, as seen with USDC's revenue fluctuations, thereby affecting overall earnings.

Valuation

• The analysts have a consensus price target of $324.32 for Coinbase Global based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $475.0, and the most bearish reporting a price target of just $170.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.4 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 55.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $181.14, the analyst price target of $324.32 is 44.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.