Coinbase Global (COIN -9.96%) stock tanked hard after a disappointing first-quarter earnings call. Higher expenses and lower revenue can do that to a growth stock in a bull market but the timing for Coinbase’s latest call couldn’t have been worse.
Coinbase’s management team presented disappointing first-quarter results while the algorithmic stablecoin TerraUSD (UST -73.37%) and its sister token Terra (LUNA -22.61%) were collapsing in spectacular fashion. Cryptocurrency prices tanked across the board when the stablecoin lost its footing and dragged Coinbase stock down, too.
After watching Coinbase lose more than half its value in a week, contrarian investors are wondering if the beating was too severe. Let’s look at the good and the bad to see if buying this stock at its beaten-down price makes sense right now.
Reasons to buy Coinbase on the dip
Tools for buying, selling, and storing crypto on its platform are how Coinbase got started, but this business wants to be a lot more than just a currency exchange. The company has been using the massive cash flows generated by the crypto trading frenzy of 2020 and 2021 to diversify its revenue sources and it’s showing early signs of success. During the first three months of 2022, subscription and services revenue jumped 169% year over year to $151.9 million.
Revenue not related to trading could jump again the next time Coinbase reports. In April, the company released a long-awaited NFT marketplace and added tools for managing non-fungible tokens (NFTs) to the Coinbase Wallet.
During the first quarter, a majority of active users engaged with a non-investing product. At the moment, staking is the most popular non-trading product on the platform. During the first three months of 2022, 5.8 million users earned a yield on at least one staked asset.
Reasons to avoid Coinbase for now
Coinbase should be commended for rapidly diversifying away from retail crypto trading, but it’s still a big part of the business. In the first quarter, the company still relied on retail transactions for 83% of total revenue.
Retail traders are notoriously fickle. Retail trading volume in the first quarter of 2022 declined by 58% compared to the fourth quarter of 2021.
The Terra project’s colossal failure is bad news for Coinbase for more reasons than one. In the near term, it will lower trading volumes because the value of almost everyone’s crypto portfolio just got a lot smaller. The failed stablecoin also pours cold water on Coinbase’s plans to tap revenue streams that don’t depend on frenzied crypto traders and the fees they’re increasingly hesitant to pay.
In a nutshell, the failed stablecoin was trying to use newfangled blockchain technology to maintain a peg to the U.S. dollar without keeping a reserve of actual dollars to back it up. This flop will cast a dark cloud over the viability of decentralized finance (DeFi) and dozens of alternative coins built to handle new DeFi protocols. Locking up tokens to receive some passive income doesn’t seem like such a great idea after you see dozens of coins lose half their value in a single week.
Hold for now
Coinbase has been investing heavily into diversifying its business and a majority of the company’s 4,948 employees at the end of March have been on the job for less than a year. As a result, first-quarter operating expenses more than doubled year over year to $1.7 billion.
My favorite way to quickly evaluate younger businesses in a high-growth phase is to measure recent gross profits against operating expenses from the previous-year period. Coinbase passes this test with an $889 million gross profit in the first quarter against operating expenses that came in at $579 million a year ago.
Unfortunately, the losses Coinbase reported in the first quarter of 2022 are probably going to get worse before they get better. Management warned investors that the company needs to continue investing heavily to help promote the entire crypto economy. With this in mind, it’s probably best to watch Coinbase from a safe distance for now.