Home Technology Coinbase Q2 Gains: Painful Loss as Crypto Winter Bites (COIN)

Coinbase Q2 Gains: Painful Loss as Crypto Winter Bites (COIN)

0
Coinbase Q2 Gains: Painful Loss as Crypto Winter Bites (COIN)

Silver Bitcoin, online digital coin currency frozen in blue ice.  Block chain concept, crypto market crash.  Crypto money frozen, depreciation

Ja Crispy

Thesis

On August 9 after market hours, Coinbase (NASDAQ:PIECE OF MONEY) released earnings for the second quarter of 2022 and was very disappointed compared to analyst consensus estimates for both revenue and earnings. Falling crypto prices caused Coinbase’s revenue to plummet by more than 60% from the same quarter in 2021 and net income fell nearly $3 billion for a loss of $1.6 billion for the quarter. Unsurprisingly, following the announcement, Coinbase stock plummeted as much as 10% (benchmark extended trading hours).

Reflecting on the very challenging macro environment, especially for crypto-related assets, I believe investors should avoid investing in Coinbase.

COIN price performance

Looking for Alpha

Coinbase June Quarter

During the period from April to the end of June, Coinbase generated total revenue of $802 million, versus $832 million expected by analyst consensus. The company’s net profit slumped with a loss of around $1.1 billion, compared to a gain of $1.6 billion in the June 2021 quarter. Coinbase’s loss was driven by a loss of $647 million and a one-time impairment charge of (hopefully) $446 million. . Management commented as following:

The second quarter was a difficult quarter, with a sequential decline in trading volume and trading revenue of 30% and 35%, respectively. Both metrics were influenced by a change in customer and market activity driven by macroeconomic and crypto-credit factors.

Coinbase’s quarterly results were badly hit, with the platform’s trading volume down around 30%, coupled with a drop of around 50% to 80% for popular crypto assets (e.g., Bitcoin (BTC-USD) is down 59%). Coinbase’s total number of customers was 9 million, up from 8.8 million last year, but down from 9.2 million last quarter.

Coinbase Q2 Results

Coinbase Q2 Results

How Coinbase thinks about the second quarter of 2022

Reflecting on deteriorating finances, Coinbase blamed the “fast and furious” crypto downturn (crypto winter) and said the company will focus on creating quality and innovative products for customers. CEO Brian Armstrong said on a conference call with analysts:

Of course, we don’t control macroeconomic factors or the recession. We don’t even really control the crypto market more broadly, do we? So what do we control?

Well, of course, we can focus on creating great products for our customers. We can focus on staying on the cutting edge of crypto technology to ensure that we create compelling use cases and deliver them to our customers. We can focus on our expense management in bear markets and, frankly, we can ensure that we are not distracted or disappointed by short-term thinking.

After bankruptcy filings from major crypto companies such as Voyager Digital (OTCPK:VYGVQ), COIN investors might appreciate that Coinbase’s balance sheet looks healthy. At the end of the June quarter, Coinbase recorded approximately $6.2 billion in “total US dollar resources” and another $428 million in crypto assets. Alesia Haas, the company’s chief financial officer, said that Coinbase plans to use these funds to invest during the recession.

The company provided an adjusted full-year outlook: Coinbase expects between 7-9 million monthly users transacting and average transaction revenue per user in the low $20 range. Just three months ago, management expected monthly transactions of between 5 and 15 million. The company’s earnings outlook remains strong, albeit tilted towards a net loss:

…we put a safeguard in place that if we went into winter, we would be operating with a loss of $500 million.

Valuation remains difficult

Personally, I am neutral on Coinbase. And one of the main reasons is that it is very difficult, if not impossible, to evaluate the company. First, investors should take into account that there is probably no comparable company listed on the stock exchange that could indicate a relative valuation. Second, Coinbase’s valuation is deeply correlated to the price of crypto, which is highly volatile and has no “intrinsic value” (not to mention worthless). Third, multiples aren’t useful either. Granted, COIN is trading at a one-year prospective assessment of x4 Price to Book and x5 Price to Sale, but without comparison to the fundamentals of the company, which are difficult to analyze, these figures do not say much to an investor. Finally, investors cannot structure a discounted earnings analysis because there is little evidence to predict the company’s long-term revenue and margin potential. And the second quarter highlighted the volatility of Coinbase’s earnings.

Implications for investors

Coinbase shares fell 8% after the earnings release (extended trading hours benchmark Aug. 9) and I think the initial market reaction was correct. The crypto industry is clearly in a bear cycle. And Coinbase’s June quarter results underscored that the company is not operating in a down cycle. While Coinbase CEO Brian Armstrong sees a “disproportionate share in the next ascending cycle”, and personally, I don’t doubt this assertion, there is no visibility on the beginning of the next “ascending cycle”. And personally, I don’t see this upward cycle with the next 6-12 months. As a result, as long as the macro environment or crypto assets remain challenging, in my view, there is little justification for owning COIN stocks. A Hold recommendation is the best I can do.

LEAVE A REPLY

Please enter your comment!
Please enter your name here