Summary Coinbase had a great Q1 2024 where the company blew past analysts' estimates. This quarter saw 3x the transaction revenue. The company’s revenue tends to move with the price of Bitcoin. I believe that Bitcoin prices are only set to go higher from here. Coinbase has also made serious strides to expand its business internationally. The company has 6.5% to 7% market share worldwide indicating plenty of room to grow. Cryptocurrency exchange Coinbase ( COIN ) has recently reported earnings. The company’s stock is up 26.4% YTD and has more than doubled year-on-year. This article will examine whether or not this valuation is justified and if the stock still has room to run. End of Crypto Winter results in exceptional Q1 Coinbase had a great Q1 2024 where the company blew past analysts' estimates. The company’s total revenue for the quarter was $1.64 billion. This was 22% higher than the $1.34 billion consensus estimate and nearly doubled from the $772.5 million reported the same time last year. In fact, revenues have been accelerating these past three quarters as interest in cryptocurrency recovers. In the previous three-quarters, Coinbase had revenues of $662.5 million, $623 million, and $904.7 million respectively. The company also delivered with its bottom-line results for the quarter as well. Net income was $1.2 billion for the quarter and was much higher than the loss of $78.9 million recorded the same time last year. The company’s massive Net Income of $1.2 billion also included pre-tax crypto asset mark-to-market gains of $737 million. Even removing this “one-time gain”, Net Income for the quarter would have been $439 million, which is still a stark improvement over previous quarters. Recall that the company ended the entire 2023 with a Net Income of only $94.9 million. Massive Increase in Coinbase Transaction Revenue Coinbase makes the majority of its revenue from Bitcoin and other cryptocurrency transactions. In Q1 2024, transaction revenue was $1.07 billion, or 68% of the company’s total revenue. This particular portion of the company’s revenue is extremely volatile and is one of the main drivers of the company’s blow-out earnings this quarter. In Q1 of last year, transaction revenues were only $374.7 million, therefore this quarter saw an increase of nearly 3x. Stockholder Letter Coinbase Because of its reliance on transaction revenues, the company’s revenue is correlated with the price of Bitcoin (and other cryptocurrencies) as volumes tend to increase during a bull market. This pattern can be seen in the chart below where Coinbase’s quarterly revenues track Bitcoin prices. Data by YCharts I believe that Bitcoin prices are only set to go higher from here, which will bode well for Coinbase’s trading volume. According to an article by Forbes , there are many key reasons to be bullish on Bitcoin. The first is due to an increased demand for block space on Bitcoin’s network due to “inscriptions”. These inscriptions and the adoption of Lightning Network enable faster transactions, turning the cryptocurrency into a proper “mode of payment”. The second important catalyst is the Federal Reserve reaching the “peak of its rate hike cycle”. While inflation remains persistently higher than the Fed’s target rate of 2%, Jerome Powell has signaled that the “U.S. central bank should remain patient and let high interest rates do its thing”. Lower rates and a “risk-off” sentiment in the markets tend to do well for Bitcoin prices. The final catalyst has to do with Bitcoin’s recently concluded “halving” event, which reduces the amount of Bitcoin that miners receive as rewards. In simple economics, the less supply of something increases its price in the long run. According to Standard Chartered analyst Geoffrey Kendrick " For 2024, given the sharper-than-expected price gains year-to-date, we now see potential for the price to reach the $150,000 level by year-end, up from our previous estimate of $100,000. " These banking analysts expect the rally to continue into 2025, with Bitcoin potentially reaching as high as $250,000. International Expansion to Drive Further Volume Coinbase has also made serious strides to grow its business internationally. The company has made a push into Europe in 2023 and is continuing those efforts this coming year. In Q1 2024 approximately 17% of total revenue came from international operations. The company has been officially registered as a “Restricted Dealer” by the Canadian Securities Administrato rs ( CSA ), t he first and largest international cryptocurrency exchange to do so. The entry into the Canadian market would increase the company’s transaction volume, as the country is home to a “tech-savvy” population. The company’s foray into Canada is part of Coinbase’s larger international strategy of actively engaging regulators in order to properly bring in their services to a country. The company has also received regulator approval in the following countries namely France, Spain, Singapore, Italy, Ireland, and the Netherlands. Coinbase’s approach is a huge contrast to that of Binance, the world’s largest cryptocurrency exchange. The former has taken a slow and steady approach to working closely with regulators and ensuring compliance. For example, when Canadian regulators required registration, Coinbase put in the work to make sure it is in compliance. Binance, on the other hand, ceased all its operations in Canada. Apart from that, Binance has recently been fined C$6 million ($4.38 million) by Canadian authorities for money laundering. Being part of a clear regulatory framework is a competitive advantage for a centralized exchange like Coinbase, as it assures traders and investors of the safety of their funds. In my view, out of all the large international cryptocurrency exchanges, Coinbase has done the best job engaging with the relevant local authorities. According to the company’s press release; A new survey Coinbase conducted in partnership with Angus Reid found that 72% of Canadians think that the regulation of cryptocurrency exchanges is important. Nearly a third of Canadians (29%) said they would be more inclined to buy cryptocurrency if there was more regulation in the industry.” It is my opinion that people in countries other than Canada view the importance of regulation in a similar way. Therefore, when more “normal” people worldwide decide on a cryptocurrency broker, Coinbase could be a top choice given its size and scale and the fact that it is regulated by the relevant authorities. Valuation In terms of valuation, the company is quite expensive in the short to medium term. The company is trading at a forward ratio of 30.7x earnings. Wall Street analysts are actually forecasting slow revenue growth, as 2024 and 2025 estimates are $5.59 billion and $5.61 billion respectively. Nine Wall Street analysts estimate EPS to be $3.78 for 2025 translating to a 2025 forward P/E of 58.2x Seeking Alpha If you look at the revisions data for the last three months 12 analysts have revised their EPS estimates upward while 22 have revised their revenue estimates upward. Looking at Seeking Alpha’s quant revision grade, Coinbase gets a solid “A+”. Seeking Alpha There is a chance for analysts to upgrade these forecasts and for Coinbase to grow into its $49.8 billion valuation. The difficulty of meaningfully forecasting Coinbase’s revenue is that the bulk of it comes from transaction revenue, which is correlated to the price of cryptocurrencies and thus highly cyclical. According to a Technavio report , between 2023 and 2028 the cryptocurrency market size is projected to grow at a CAGR of 16.64%. Furthermore, Coinbase, according to research firm CoinGecko , has a 6.5% to 7% market share of worldwide Centralized exchange trading volume. This means that the company has the potential to steal market share from existing players in non-US countries. Spot Trading Volume Crypto I believe that the company can at least grow its market share by 50% to double as it expands to other countries. I believe that the company can 3x its peak 2021 revenue of $7.8 billion from international market share growth, the continued rise in Bitcoin prices, and more "normal everyday" people starting to buy Bitcoin and other cryptocurrencies. This will give Coinbase a 5-year long-term revenue forecast of $23.4 billion. Note that while this is an optimistic speculative forecast, it isn’t far from reality. In 2021, Binance was estimated to have revenues of $20 billion . Given Net Income margins of 25% and a P/E of 15x, this gives me a valuation of $87.7 billion or a price of $332.8 per share for Coinbase. My valuation target is close to the high end of Wall Street price targets for Coinbase’s stock. JMP Securities and HC Wainwright have market outperform ratings with a $320 and $300 price target respectively. It should be noted that doing long-term valuations for speculative companies like Coinbase means relying on a lot of assumptions. Truth be told, nobody knows what revenue will be like for Coinbase, as it is highly dependent on the prices of Bitcoin and by extension other cryptocurrencies. Therefore, these valuation estimates come with a lot of volatility and risks, as the low-end Wall Street analysts have a Coinbase price target closer to $200 per share. I have a “buy” rating on Coinbase stock, and I acknowledge these risks and the fact that the stock is on the expensive side. In some ways, a bet on Coinbase is a bet on the future of cryptocurrencies, on which I am bullish.
