Coinbase Global, Inc. (NASDAQ:COIN) is a profitable young growth company that was listed in April 2021. After the massive sellout from management and members of the board of directors, investors are interested in the future of the company and its performance as a stock. We can envision Coinbase's performance being a function of management's interests and performance, the price of crypto in the market, and the regulatory framework in which they operate. In this article, we will analyze the mentioned factors as well as the financial performance of Coinbase.
There are three meaningful recent events that will discuss, and get investors up to speed:
First, we start with the news that Coinbase plans to drop the Crypto-Lending Platform
There has been a lasting altercation between the SEC and the Coinbase leadership, which was described as legislation by litigation, where the SEC considered the USD Coin (USDC) as a security and wanted to litigate based on the Howey and Reves Supreme court case. It now seems that Coinbase decided to shut down the "Lend" project based on pressures from the SEC and will have to look for opportunity elsewhere.
The current state of crypto is still not defined, and most of the world has not decided on how to treat crypto in the long term. That is why legislative direction is a large risk factor for this landscape. Countries may decide to enforce a certain control and oversight on crypto, to accept it as a legal currency/asset or to declare it illegal in most forms.
Investors who are betting on crypto are also betting on a favorable political landscape, or that they can get out of it before the situation erupts.
The second piece has to do with the recently announced class-action lawsuit against Coinbase based on their IPO prospectus and the activities thereafter.
The Portnoy Law Firm Files Class Action Lawsuit on Coinbase Global. After looking at the short summary, it is my opinion that this case is part of the professional lawsuit culture, stemming from fine combing for legal errors rather than from grievances from injured parties. The summary reports that Coinbase mislead investors by presenting their cash balance as sufficient, neglecting to mention risks and presenting positive statements about the business that were baseless. While most of these mentioned points can be argued to be true, it does not necessarily mean that the prospectus along with the business discussion and the risk disclosure section were the key factors for investors to buy Coinbase shares. All of this has yet to be proven in court, and even if lost, the outcome may not have a material impact on Coinbase.
Last, Coinbase recently issued senior corporate bonds, underwritten by JP Morgan, Goldman Sachs, Citigroup.
The company issued two separate notes, one for US$1b at 3.375% interest due 2028 and the second for US$1b at 3.625% due in 2031. The offering was increased to US$1.5b based on "market interest".
Issuing debt can be a significant event in a company. The better timing to issue debt is when the company is profitable and expected to be profitable in the future, as the interest payments can offset the cost structure and help the company legally minimize taxes.
In the case of Coinbase, we present their fundamental performance below and also note that they have recently announced that they are looking for acquisitions - this means that they cannot't quite keep up with growth from their own business model and must find new companies to acquire that will help them grow ahead of competition. As we will see, the company is profitable and can probably sustain the debt payments, barring massive disruption in the next 10 years.
We can see that Coinbase has significant revenue that scales up well, based on the low operating expenses, and is even profitable. This is very good performance for a young company, and may render them a target by competitors which can try to copy and improve upon their business model.
It seems that the business is making most of the money from new and active crypto investors. The active part is important, because the company makes money when investors make transactions from their platform. A large number of one-timers may be detrimental to the future of Coinbase.
Growth is hard to estimate as the landscape for crypto is still developing, and history has taught us that there is no doubt whether the state will interfere, only that the extent of interference will be put into question.
At present, the company seems to be trading around fair value, but their income is highly dependent on crypto transactions by users, and the performance of the most frequently traded crypto assets. In a sense, the company's future is tied to the future of crypto, which is currently very hard to estimate. This lack of foresight represents both risk and opportunity for new investors.
Coinbase is a young and already profitable company. Insiders sold out a large stake around the IPO date, which diminishes the confidence that their interests are aligned with the interests of shareholders.
As the company is profitable and revenues scale well, competitors might target their business model and seek to copy operations, which will put pressure on Coinbase margins.
The first altercation with the state made them shut down their lending project, which may be a foreshadowing of what is to come regarding regulatory movements in the future.
The success of Coinbase is tied to the performance of the most popular crypto assets and the freedom for investors to engage with them. As both of these factors are uncertain, Coinbase probably represents a high-risk-and-reward venture for investors.
Keep in mind, when it comes to analyzing a stock, it's worth noting the risks involved. While conducting our analysis, we found that Coinbase Global has 1 warning sign, and it would be unwise to ignore this.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.