Coinbase: Base Fees Moving The Wrong Direction

Summary Coinbase stock has declined over 30% since mid-July, despite the broader market’s slight increase. Q2 earnings showed mixed results: net revenue down 13.1% QoQ but up 108% YoY; transaction revenue fell, while subscription/service revenue grew. Base blockchain metrics are promising, with surging daily active users and transactions, but Base sequencer fees have declined, impacting revenue. Despite favorable October seasonality, COIN’s valuation remains high; I maintain a “hold” rating, with a preference for spot ETFs to play the BTC thesis. Since my last Coinbase ( COIN ) article on Seeking Alpha from mid-July, we’ve seen the company’s stock pullback by over 30%. And this performance comes even as the broader market has moved slightly higher: Data by YCharts Coinbase: All About That Base Coinbase: Priced For Perfection This will be my 10th Coinbase article since originally calling the stock a “buy” at $33.53 in January 2023. In each article since that piece, I’ve rated the company’s stock a “hold.” Regardless of my concerns about Coinbase’s long-term business model, one of my bigger immediate issues with longing COIN stock back in July was the company’s valuation. In this article, we’ll assess some takeaways from Q2 earnings, look at seasonality and correlations, and jump into the latest network metrics from the company’s Base blockchain. Q2 Earnings For the quarter ended June, Coinbase reported over $1.4 billion in total revenue. Net revenue was down 13.1% quarter over quarter but did experience a 108% increase over the prior year. Breaking the revenue down by segment, subscription and service revenue generated quarter-over-quarter growth of 17.2% while transaction revenue fell by 27.5% from Q1. That said, transaction revenue was the larger driver of year over year revenue growth at 139% versus 78.6% for subscription and service revenue. Q2 Revenue (Coinbase) Subscription and service revenue accounted for 43.4% of net revenue, which makes Q2 the largest quarter of sub/service revenue percent since Q3-23. This was largely driven by blockchain rewards revenue, which grew 41% from Q1 and now makes up 13.4% of net revenue for the company. At $664.8 million in the quarter, consumer transaction revenue is still a very important part of the company’s overall business and equates to just under half of Coinbase’s Q2 net revenue. Compared to Q1, Coinbase was less reliant on consumer transaction revenue for net revenue, but we’re still seeing consumer transaction share of net revenue grow from 43.6% to 48.2% year over year. COIN Monthly Transacting Users (TheBlock) For the quarter, Coinbase averaged 8 million monthly transacting users. This was notably higher than the 7 million from Q1, but well below the Q4-21 peak of 11.4 million monthly transacting users. There are two ways to potentially look at that; on one hand, Bitcoin ( BTC-USD ) is within striking distance of a new all-time high, which many expect to be a matter of months away. Given that, the lack of meaningful user growth over the last three years could be concerning. On the other hand, it could also be indicative of a lack of FOMO in the market despite Bitcoin’s price currently positioned well ahead of $60k per coin. Another possible explanation for the lack of user growth is the users may have just changed how they’re engaging with the company. For instance, Coinbase has prioritized on-chain activity that could mitigate declines in centralized exchange usage over time. Base Usage Q2 is the second quarter that Coinbase has broken out “other transaction revenue” which includes revenue from Base sequencer fees. The other category was down QoQ from $56.1 million to $52.5 million as of quarter ended June. Coinbase specifically mentioned lower Base fees as the driver of this revenue decline. There is a strong likelihood that we’ll see this revenue segment head even lower in Q3, given what we’ve seen on chain through this point in September. Base: Fees vs DAUs (Token Terminal) Consider the monthly sequencer fees for Base reported by Token Terminal going back to April. Between April and June, Token Terminal tracked Base fees totaling $26.8 million. There is admittedly still a week remaining in September, but as of article submission, Q3 Base fee revenue is less than $7 million for the full quarter . This speaks to the unpredictability of on-chain usage. The good thing for Base is DAUs have been surging month after month. As of 9/22/24, September is averaging 1.2 million daily actives – nearly double the figure from September 2023. ETH L2 Transactions (Artemis) Daily transactions have generally been trending higher each month across the Ethereum ( ETH-USD ) L2 landscape. Yet, the strongest growth story is Base, which processed 120.8 million transactions in August. This was up nearly 8x the 15.9 million transactions Base processed in August 2023 and was more than transactions processed by Optimism ( OP-USD ) and Arbitrum ( ARB-USD ) combined. Chain Stablecoins (DefiLlama) Looking at the stablecoin footprint for Base, at $3.6 billion in stablecoin supply, Base is quickly approaching Solana for the number 5 spot on the total stable supply rankings. This is impressive given the fact that Base is an ETH L2 and yet, it can hold up against L1s not just for stable supply, but also active users. I see a real opportunity for Base to grow share over other chains given Coinbase is a major crypto on-ramp and also has a financial relationship with the second largest USD stablecoin issuer in Circle. However, that’s very speculative and beyond the scope of this article. Seasonality, Correlations, & Valuation When I last covered COIN in July, I noted favorable seasonality in July but a more mixed return in August. September has once again proven to be a poor month for COIN returns, but October is now right around the corner: COIN Seasonality (TrendSpider.com) With a 15.3% mean return in October, we are now entering what is historically one of the best months of the year for COIN. Of course, this is a very small sample size, as COIN was only listed a few years ago. But Bitcoin itself has a longer history and the seasonality story for BTC in October is also a favorable one for bulls with a 19.1% mean return going back to the last decade. From a correlations standpoint, BITO is a slightly stronger driver of COIN returns than the Nasdaq: COIN BITO SPY QQQ Coinbase Global Inc 1 0.61 0.54 0.58 ProShares Bitcoin Strategy ETF ( BITO ) 0.61 1 0.44 0.45 SPDR S&P 500 ETF Trust ( SPY ) 0.54 0.44 1 0.95 Invesco QQQ Trust ( QQQ ) 0.58 0.45 0.95 1 Source: PortfolioVisualizer.com, asset correlations for time period 01/01/2022 – 08/31/2024 based on daily returns While the 60-day rolling correlation between COIN and BITO has been somewhat volatile, the correlation has not gone negative at any point since the beginning of 2022. COIN-BITO Correlation (PortfolioVisualizer.com) Thus, I’d say it’s fair to assume Coinbase stock will do well if Bitcoin is rallying to new highs over the next 3-12 months. That said, valuation is still high from where I sit. Data by YCharts At 7.4x forward sales, COIN’s price to sales ratio has pulled back from summer highs, but it is still well ahead of the financial sector median of 2.9. The same is true for the company’s forward PE, which trades at about a 135% premium to the sector. Closing Takeaways While COIN’s relationship with BTC if fairly self-evident, there is a far more interesting story for Coinbase longer term, in my opinion. The company has an opportunity to change how people pay each other utilizing USDC on the Base blockchain if it can get UE right. For me, it’s worth keeping an eye on how that stablecoin supply story continues to play out for Base. Base users and transactions are growing nicely. As a crypto on-ramp, Coinbase is theoretically in an advantageous position to incentivize USDC adoption on-chain through B2C fee reduction when processing payments. Of course, COIN shareholders likely need to see Base sequencer fees start heading the other direction to get more excited about that business. Seasonality is good heading into October, but valuation is still well ahead of itself in my view. I’m going to still rate COIN a “hold.” The stock will probably continue to be correlated with BTC for the short to medium term, but I suspect spot ETFs will be the less stressful way to play the long BTC thesis.

Source: Seeking Alpha