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Down 46% From Its All-Time High, Is It Time to Buy Coinbase Stock?

Motley Fool - Tue Feb 20, 3:15AM CST

The roller coaster continues for Coinbase(NASDAQ: COIN). After its shares tanked 86% in 2022, they skyrocketed 391% last year. And the business just reported fourth-quarter 2023 results that were incredibly well-received by the market, sending its shares even higher in 2024.

Despite its remarkable comeback, this top crypto stock remains 46% off its all-time high (as of Feb. 16). Does this mean it's a good idea to buy the dip?

Crypto summer?

Rising interest rates and macro uncertainty in 2022 crushed the cryptocurrency market, which lost about two-thirds of its value that year. But 2023 was a bounce-back period, as the industry gained about $800 billion in value, good for a doubling. The momentum has continued into 2024. Perhaps the so-called crypto winter has changed seasons to become crypto summer.

This favorable backdrop benefits Coinbase, a leading brokerage and exchange operator. It reported net revenue of $905 million in the last quarter, up 50% year over year. This was driven by consumer trading volume that jumped 164% quarter over quarter.

Because 59% of Coinbase's sales still come from trading fees, it's not a surprise the company would perform extremely well when crypto asset prices are soaring. Interest in digital tokens from both individual and institutional investors is high right now, and Coinbase is a popular platform for gaining exposure.

The business has focused relentlessly on cutting costs, a similar strategy that many other tech enterprises have undertaken, particularly following the bloat that might have been created during the pandemic boom. But even with a drive for efficiency, I think investors were surprised when Coinbase reported positive net income in Q4 2023 of $273 million. This is a huge reversal from the net loss of $557 million in Q4 2022. A huge one-time tax benefit helped here.

Expect volatility

Despite the impressive results, Coinbase is still heavily dependent on the excitement surrounding crypto assets. I'm confident the market will experience ongoing boom-and-bust periods, which will directly affect the company's financial performance.

To its credit, the executive team has been prioritizing subscription and services, which raked in $375.4 million of revenue last quarter (up 33% year over year), representing 44% of total net revenue. This segment consists of custodial fees, an area that could get a boost since Coinbase is a custodian for many of the Bitcoin spot exchange-traded funds. There's also staking revenue from allowing its users to lock up their tokens on various blockchain networks.

But the biggest contributor to subscription and services is interest income. It accounted for 57% of the segment's total in Q4 2023, a figure that stems from the company's activities with the USDC stablecoin and customer funds. While this lessens Coinbase's dependence on the movement of crypto prices, it does make the business reliant on higher interest rates. If the Federal Reserve reverses course and cuts rates, this huge revenue generator could dry up for Coinbase.

Consequently, it's reasonable to assume that the company's financial results will continue to be volatile going forward from period to period. Management is trying to transition the cryptocurrency industry from one characterized by excessive financial speculation to one driven by greater utility. I think we are still in the former situation.

That doesn't mean the stock should be ignored. Only investors who believe in the long-term success and viability of the crypto market should add this business to their portfolios. Should the industry become a much larger part of the overall economy a decade from now, it's hard to envision a scenario where Coinbase isn't a winner.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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