Summary Coinbase stock has outperformed Bitcoin, powered by revenue up 111.98% YoY, proving dominance in the Bitcoin ETF custody market. Despite Bitcoin's range-bound status, institutional investments in crypto funds are surging, benefiting Coinbase. While risks include competition from platforms like Robinhood, I believe Coinbase's strong fundamentals and market positioning make it a strong buy. Investment Thesis Since March of this year, while Bitcoin's ( BTC ) price has dropped by over 13% as of the time of this writing, Coinbase (COIN)'s stock has outperformed BTC, falling just 2.39%. Bitcoin's high watermark came in March, with the cryptocurrency trading slightly above $73,800 , which propelled Coinbase's stock to the highest level in almost 3 years. Fast-forward to today, BTC is trading at about $63,000. These recent shifts in the Bitcoin market can be largely attributed to significant sell-offs by Bitcoin whales, who have chosen to realize gains following a period of near record-high prices. Bitcoin whales (or large holders of BTC) have sold over $1 billion in BTC over the last 2 weeks. Other large holders, such as the German government, have sold off hundreds of millions of dollars of Bitcoin over the weekend. The sell-off by large Bitcoin holders is a tactical move by Bitcoin "whales" to liquidate part of their holdings to capitalize on price spikes. This has been further exacerbated by Bitcoin miners, who faced profitability pressures due to the rise in operational costs and regulatory uncertainties. While the price of BTC is down, Coinbase continues to operate well with BTC custody. As of June 19th, Coinbase currently holds about 4% of BTC in circulation, or 890,000 BTC in their custody. When the spot BTC ETF was approved, Coinbase immediately became the custody partner of 8 of the exchange-traded products. It is clear that Coinbase dominates this sector and is winning the institutional game, with their recent revenue numbers proving this. As of May 2024 , revenue was reported as $1.64 billion, up 111.98% YoY, beating expectations by $265.79 million. I predict we will see this success continue, and I believe, with EPS set to continue to grow significantly. Therefore, I believe Coinbase is a strong buy. Why I Am Doing Follow-Up Coverage Coinbase has outperformed Bitcoin since my last coverage in March, especially considering the general downturn we've seen in crypto prices during the same period. Typically, a decline in Bitcoin could pose a threat to long-run custody fees. However, I think Coinbase's diverse offerings buffer against this. The market's current view of Bitcoin as range-bound is understandable, which some investors may see as a deterrence to future upside potential. Historical data shows that prolonged periods of lateral movement often precede significant price adjustments, either upward or downward. While this could have been bad for future growth in companies like Coinbase, but it's critical to recognize that Coinbase's earnings power extends beyond mere transaction fees associated with Bitcoin trading. Coinbase's revenue base is far more diversified this time around. Coinbase's strategic advantage lies in their dominant position within the Bitcoin ETF custody market. This position is not just about holding assets but also about earning custody fees, which are less sensitive to price fluctuations than transaction fees. Thus, even if Bitcoin prices remain stable, the inflow of ETF assets can still provide a stable revenue stream. The purpose of this follow-up coverage is to demonstrate how BTC will power Coinbase earnings even if BTC's price remains range-bound. I do not expect BTC to remain range-bound, but even if it does, Coinbase's earnings will increase on a year-over-year basis. Bitcoin Is Range-Bound. What Now? Bitcoin has been largely range-bound since mid-March. In April , Bitcoin's halving occurred, which resulted in a decrease in daily supply (daily mined supply dropped from 900 to 450/day). Since then, Bitcoin prices have stayed roughly in a plus/minus 10% range. With Bitcoin's price remaining flat, the influx of institutional investments into crypto funds (Bitcoin ETFs, in particular) has jumped, given that many of these institutions had or no BTC exposure just 7 months ago. I believe despite the market sentiment, optimism among large-scale investors remains robust. Recent 13F SEC filings and analysis from a number of sources have highlighted a significant increase in institutional holdings in these financial vehicles. With recent surges in investment-like the $130 million institutional inflow into crypto funds - Coinbase continues to capture the lion's share of the market. I think that even if Bitcoin prices remain static, the growing stock of the cryptocurrency under professional management demonstrates a bullish outlook for the sector. It shows, in my opinion, a strategic move in investment strategies, where traditional funds are increasingly legitimizing and integrating digital assets into their portfolios. Coinbase benefits from all of this due to the asset management and custodying fees I mentioned in my last piece. Valuation Coinbase's forward revenue growth rate is higher at 22.48% compared to the sector mean of 5.12%, which indicates the company's impressive performance relative to their peers. In essence, the company is able to outperform sector median growth by 339.44%. With such strong growth, the market has rewarded Coinbase with a forward P/E ratio of 31.85 , which is substantially above the sector median of 10.63. However, I actually think this is a conservative P/E when we consider growth factors. When we do a comparative analysis, we find that Coinbase's forward P/E is 199.70% above the sector median, while their growth rate is actually 339.44% above the sector median. This means buying the stock right now at a 199% premium P/E will get you a growth rate that is 339.44% higher than the sector norm. I think this is incredible. I believe we could see the forward P/E premium expand further to a 300% premium above the sector median given the strong growth rates. This means at this point, we would be paying a 300% premium on P/E to access a company that is growing 339% above the sector median. I think this is reasonable. If the forward P/E premium moved up from a 199% premium to a 300% premium, this would represent about a 50% increase in share price, assuming all other variables stayed the same. What I believe the market is signalling here is that it is not sure if these growth rates can stay this elevated above the sector median. After all, the company saw a decline in EPS and revenue during the crypto bear market in 2022 ( 10-K ). Why would this be any different? I think a key distinction to the previous bull market is custodying fees. Custodying fees grew 90% year over year in Q1 and I expect this growth to continue ( 10-Q ). This is revenue that will allow Coinbase to be far more robust in the next bear market, meaning I believe shares can continue to trade at this premium. Why I Think Coinbase Deserves A 300% Premium I think the biggest reason we can see Coinbase carry a 300% premium is that while we are expecting strong revenue growth over the next 12 months, EPS growth this year is set to be even more explosive. EPS estimates for this year (ending December 2024) are expected to come in at $7.24/share , or 1,856.73% YoY growth. EPS growth for the sector median is expected to come in at just 3.42% year over year. This growth story is, in my opinion, far more than 300% more exciting than 3.42% growth. Keep in mind as well that these estimates (and the ones for 2025) may be conservative as well. Coinbase saw EPS come in at $4.40/share alone in Q1. This is more than 50% of what the full-year EPS is forecasted to be and higher than the full 2025 estimates. So while their current forward P/E may be 199% higher than the sector median, I believe that forward growth for projected EPS also adds credibility to this (along with revenue growth). Forward EPS estimates appear conservative too, allowing room for the forward P/E to come way down while also allowing for a buffer due to the volatility in crypto. How This Compares To My Last Estimate In my last piece of analysis, I believed that shares could move up about 12.5% based on Bitcoin custodying feels getting priced in. Since shares are actually down about 2.39% since this publication, my previous analysis indicates there would be about a 15% upside in shares. However, since we are now incorporating a relative valuation method, I think shares have more upside (around 50%). This is because, in my last piece, I only looked at how custodying fees could push the shares higher. I did not analyze the benefit of Coinbase's subscription revenue too. In this case, we're finding that subscription & services revenue well exceeded the overall company YoY revenue growth of 41%. This revenue grew 122% YoY (10-Q). I think, with such powerful (and more stable) growth metrics, this provides an excellent opportunity for shares to trade at a higher premium to the sector median. Risks While Coinbase has diversified their revenue streams (compared to the last cycle) beyond transaction fees on cryptocurrency trades, a significant portion of their valuation is still influenced by the health and trends of the Bitcoin market. With this, a sharp decline in Bitcoin prices could lead to reduced trading volumes that will affect transaction fee revenues and potentially cause asset flows to reverse as investors pull back from the cryptocurrency space in search of stability or higher returns elsewhere. In an extreme scenario, this would affect custodying fees too. Adding to this is the increasing competition from platforms like Robinhood ( HOOD ), which has recently reported gains in retail flows, particularly in cryptocurrencies. Robinhood's resurgence through their strong rebound in retail trading and a record Q1 2024 revenue fueled by increased cryptocurrency trading. This combination makes them a strong rival against Coinbase's market share. However, despite these risks, I still remain optimistic about Coinbase's future. The overall cryptocurrency market is expected to expand significantly. Innovations and increasing adoption of blockchain technology across various sectors provide a broader base for growth, which could benefit all major players, including Coinbase and Robinhood. In addition, Coinbase has established strong ties with institutional investors and clearly now boasts significant custody assets (this is something that Robinhood, while I am bullish on them, does not do). The company recognizes that their current leads are temporary though unless they invest more. They are doing exactly that. According to Coinbase CFO Alesia Haas, during the company's Q1 2024 earnings call : As we look at 2024, we are going to be making investments. We have planned to be prudent and modest to support the strong performance, we've seen year-to-date and especially some of the early traction that we're seeing, for example, in Base, in USDC and some of these other products, that are not as correlated with crypto market prices and volatility - Q1 2024 earnings call. This segment could see further growth as traditional financial entities seek exposure to cryptocurrencies, potentially stabilizing revenue flows even if retail trading faces fluctuations. The exchange is being prudent about managing risk with market volatility. I like it. Takeaway I believe Coinbase has demonstrated a strong performance so far this year, with their stock price up roughly 29.86% year-to-date. On top of this, even with BTC being range-bound, I think there are compelling reasons to believe there is still more room for growth for Coinbase's EPS. The company's now far more robust business model and strategic positioning have allowed them to clearly outperform despite the broader market's challenges. The key to their success has been their dominance in the Bitcoin ETF custody market and significant transaction revenue gains from both retail and institutional investors. The market for cryptocurrencies as a whole continues to evolve rapidly, with institutional interest and mainstream acceptance growing, I believe this trend will not reverse. Coinbase's initiatives, such as expanding into staking, offering more blockchain-as-a-service options, and maintaining strong security protocols, will help capitalize immensely on these trends. I do not think we have even begun to price in what the fair value of these innovations is. I believe the stock continues to be a strong buy. I'm excited to see where it goes.
