Coinbase Earnings: Lower Trading Volume and Cryptocurrency Losses Push Net Income Down

Key Morningstar Metrics for Coinbase

• Fair Value Estimate: $135.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Coinbase’s Earnings

Coinbase COIN reported another sequential decline in the third quarter, as lower cryptocurrency prices pressured its trading volume and some of its fee-based revenue sources. That said, the firm remains in a far better position than a year ago, as cryptocurrency market conditions are healthy. Net revenue increased 81.2% from last year but decreased 17% from the previous quarter to $1.13 billion. Meanwhile, net income was $75 million, including $92 million in aftertax losses on cryptocurrency assets.

As we incorporate these results, we do not plan to materially alter our fair value estimate of $135 per share, which we see as overvalued. With earnings, Coinbase announced a $1 billion share buyback program. We generally do not like to see companies repurchase shares at such a high premium to our fair value estimate, but we acknowledge that the firm has built up a considerable amount of excess cash, and the inherent volatility of cryptocurrency markets makes a regular dividend policy a poor choice.

Coinbase’s transactional income increased 98% from the previous year but decreased 27% from the past quarter to $572.5 million. Retail transactional income (Coinbase’s largest source of revenue) was the primary culprit behind the sequential decline, as it fell 27% quarter over quarter to $483 million. Lower trading volume industry-wide was the main cause, with US spot market volume decreasing 18% from the previous quarter, with a decrease in nontrading transactional revenue aggravating the drop.

That said, while retail trading revenue remains a key driver of Coinbase’s results, the firm is no longer as reliant on this as it once was. The growth of its non-trading businesses, like its Base sequencer fees, has reduced some of the volatility of its results, though it remains highly exposed to cryptocurrency markets.