Coinbase Stock: Volatile, but Potentially Undervalued

Coinbase Global (COIN) is an American cryptocurrency exchange platform that operates remotely through its website and mobile application without any physical headquarters.

I am bullish on Coinbase as its strong competitive position in its industry, robust growth momentum and outlook, and strong support from Wall Street analysts make it appear to be an attractive time to add shares. (See Analysts’ Top Stocks on TipRanks)

Strengths

The company was founded in 2012, and as of March 2021, it is the largest cryptocurrency exchange platform in the U.S., based on trading volume. 

Coinbase offers products for institutional investors as well as retail. These products include Coinbase, the app for trading in Bitcoin, Ethereum, Litecoin, and other currencies, as well as platforms like Coinbase Prime for institutional traders.

It also offers services like Coinbase Card, a debit VISA card for customers to spend their cryptocurrency.

Recent Results

For the third quarter, 2021, the company reported a total trading volume of $327 billion, growing 626% year-over-year.

However, this shows a decrease since the most recent quarter by about 29%. The decline is in-line with the decline in the overall crypto market volume. Meanwhile, the total retail contribution toward trading volume was about 28%, with the remaining 72% being institutional.

Institutional trading shows a drop of 26% since the previous quarter, with this decline being driven by low volatility. Retail volume also shows a decrease from the last quarter for the same reason.

Institutional trading largely takes place using Bitcoin and Ethereum, though other crypto assets represented more than 50% of the total trading volume. However, institutions are starting to diversify into other crypto assets as well. The continued expansion in these assets provides users with greater choices and provides a competitive advantage.

Total assets on the platform were valued at $255 billion by the end of the third quarter, showing a 41% increase from the most recent quarter and a 608% increase year-over-year.

The company’s net revenue was $1.2 billion in the quarter, of which $1.1 billion was Transaction revenue and $145 million was Subscription and Services revenue. Transaction revenue showed a decrease of 44% sequentially but showed an upward trend in the later months due to improving market conditions.

Valuation Metrics

Coinbase’s stock looks attractively valued at the moment as its forward enterprise value-to-EBITDA ratio is currently 20.4x, and its forward price-to-free cash flow ratio is 26.2x. These ratios are quite low for a company with such massive growth potential and strength in competitive positioning in its industry.

Wall Street’s Take

Turning to Wall Street, Coinbase earns a Strong Buy consensus rating based on 13 Buys, two 2 Holds, and one Sell rating assigned in the past three months. 

Additionally, the average Coinbase Global price target of $398 implies 25.2% upside potential.

Summary and Conclusion

Coinbase is a key player in a high-growth industry and trades at a valuation that looks highly compelling. This view is further solidified through the overwhelming support it receives from Wall Street analysts at the current share price.

With numerous avenues for innovation and growth moving forward, Coinbase’s relatively low valuation multiple provides massive upside potential through a combination of per share growth and multiple expansion.

That said, investors should keep in mind that Coinbase operates in a very volatile industry with major regulatory uncertainty and risk ahead, so the stock price will likely gyrate significantly moving forward.

However, for those willing to accept the volatility and risk involved with the stock, it could be a good time to add shares in Coinbase.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.