Coinbase: Sell This Rebound Rally As Yields Weaken (Downgrade)

Summary I’m downgrading Coinbase Global to a sell after a strong rebound, as fundamentals no longer justify its elevated valuation multiples. Q1 results were disappointing; revenue missed expectations, and subscription/services revenue slowed sharply, raising concerns for future quarters. Declining interest rates threaten USDC net interest income, and heavy reliance on altcoin trading revenue and rising competition add to long-term risks. With growth slowing to low teens and valuation at risky multiples, I recommend locking in gains and waiting for a better entry point. To me, the number-one rule when investing amid market volatility and elevated valuations is this: don’t get attached to any individual position. Carefully and consistently monitor the stock positions in your portfolio, and when fundamentals no longer support valuation multiples, don’t hesitate to lock in gains to invest elsewhere. That’s how I’m treating Coinbase ( COIN ), one of the most recognizable and prominent crypto wallets and trading platforms. The stock has rebounded more than 60% relative to year-to-date lows near $160 (when the stock fell on fears of crypto price deflation and lower trading volatility), but since then, the stock has roared back alongside the rest of the S&P 500, despite releasing what was arguably a weak and concerning Q1 print. Data by YCharts I last wrote a buy article on Coinbase in March , encouraging investors to buy the dip when the stock hit $170. However, I treat Coinbase like I would any cryptocurrency: as an instrument to be traded, but not necessarily something I’m willing to hold blindly through volatility. I’m discouraged by weak signals coming from Coinbase’s Q1 earnings print, including and especially subscription and services revenue coming in below the midpoint of the company’s guidance – and a weak signal for the second quarter ahead. Though cryptocurrency prices are stable and Bitcoin remains trading above $100k, I fear further pressure on Coinbase’s revenue streams and am downgrading the stock back down to a sell rating. To me, these are the biggest risks that Coinbase faces: Declining interest rates may pressure Coinbase’s USDC revenue in more ways than one. One of Coinbase’s most reliable and profitable revenue streams over the past few years has been to encourage investors to park USDC in their Coinbase wallets (often with the incentive of a minor yield as a reward). This has turned Coinbase into a quasi-bank with net interest income, earning a spread between the interest it receives from parking dollars into short-term treasury bonds and what it pays out as rewards. As interest rates decline, however, the company’s spread will thin out (and additionally, lower yields may encourage investors to park their spare cash elsewhere, like dividend stocks). Heavy reliance on altcoins for trading revenue. My long-term view is that the variety and number of coins will shrink, and only a few dominant cryptocurrencies will survive. Altcoins represent over one-third of Coinbase’s trading revenue because lower liquidity on these coins earns Coinbase wider trading spreads. Over the long run, Coinbase’s lucrative trading revenue streams may be under pressure if altcoins fade. Much heavier spending amid sharp competition. Coinbase’s adjusted EBITDA is falling, in large part due to heavy sales and marketing expense (a combination of both performance marketing to draw new customers, as well as rewards paid out to users to encourage them to maintain balances in their Coinbase wallets). There is no shortage of popular crypto wallet services now, with Coinbase competing directly against the likes of Kraken, Gemini, Binance, and even Robinhood ( HOOD ). I’m also concerned about Coinbase’s surging valuation after its rebound rally. At current share prices near $254, Coinbase trades at a market cap of $64.66 billion. After we net off the $11.54 billion of cash, USDC, and crypto held for investment on Coinbase’s latest balance sheet against $4.51 billion of debt and crypto borrowings, the company’s resulting enterprise value is $57.63 billion. Meanwhile, for FY 2025, Wall Street analysts are expecting Coinbase to generate $7.44 billion in revenue, or 13% y/y growth. Even if we aggressively assume Coinbase can retain its trailing 12-month adjusted EBITDA margins flat at 46.9% (recently, margins have been sliding due to higher sales and marketing spend), FY 2025 adjusted EBITDA would be $3.49 billion (+5% y/y). This puts Coinbase’s valuation multiples at: 7.7x EV/FY 2025 revenue 16.5x EV/FY 2025 adjusted EBITDA For a company whose growth has slowed to the low teens, relies on very volatile trading revenue and faces risk from net interest income reductions as interest rates fall, I consider these to be quite risky multiples to buy Coinbase at. I’ve enjoyed a healthy and sharp gain since buying the stock in March – I recommend investors to lock in gains here and wait for a better price to re-emerge before buying back in. Q1 download: worrying signals on revenue miss and subscription revenue slowdown Let’s now go through Coinbase’s latest quarterly results in greater detail. The revenue growth trends are shown below: Coinbase revenue trends (Coinbase Q1 shareholder letter) Coinbase’s total revenue grew 24% y/y to $2.03 billion, widely missing Wall Street’s expectations of $2.08 billion (+27% y/y) by a three-point margin. To me, there are multiple points of concern. The first is the delegation in trading revenue, which contracted -19% q/q versus Q4 and who’s 17% y/y growth came in well below trading revenue nearly tripling y/y in Q4 (which included the very volatile election quarter in which cryptocurrencies rallied on Trump’s re-election). Volatility appears to have cooled off the in the crypto markets, with prices stabilizing – which is a major deceleration driver for the company. The bright side here is that we applaud Coinbase’s continued ability to encourage more institutional adoption of the Coinbase platform, especially with its increased focus on stablecoins ( OTC:USDC ). Institutional trading volumes now dwarf consumer trading, at a total of $315 billion in total transactional volume in Q1 (+23% y/y) as shown in the chart below. We do note, as previously mentioned, that Coinbase continues to have a disproportionate reliance on altcoins for trading revenue, as “other crypto assets” represented 36% of Coinbase’s $1.26 billion of trading revenue. Coinbase institutional vs. consumer trading (Coinbase Q1 shareholder letter) To me, however, the even bigger concern is the fact that Coinbase suffered a sharp slowdown in subscription and services revenue. As a reminder here, Coinbase drives non-trading revenue from a number of sources: including blockchain rewards, subscription fees for Coinbase One ($30/month for Basic and $300/month for Premium). One of the biggest drivers of revenue for the company, however, is stablecoin revenue (the largest contributor to total subscription/services revenue, with a 43% share of the total) – which derives primarily from interest on user deposits of USDC over and above its payment of rewards. Coinbase subscription revenue versus guidance (Coinbase Q1 shareholder letter) Originally, as shown in the chart above, Coinbase had guided to $685-$765 million in subscription and services revenue – it came in on the lower end of that range at $698 million in revenue, up “only” 37% y/y versus 73% y/y growth in Q4. The company has had no problem attracting higher stablecoin balances (stable coin revenue is still up 51% y/y). Average USDC holdings per user have tripled, per CFO Alesia Hess’ remarks on the Q1 earnings call: Second, we saw a spot volume mix shift, which was more concentrated about market makers and liquidity providers, which tend to have lower fee rates. Our subscription and services revenue grew 9%, and we saw an all-time high of $698 million, nearly $700 million in revenue. Two drivers of this growth: first, stablecoin revenue grew 32% quarter-over-quarter to $298 million. Over the last 2 years, we have seen MDUs holding USDC double, and the average balance of USDC per holder has tripled. Coinbase One also continued to add new subscribers as we extended new benefits.” Still, I find the risk of lower interest rates (especially if the Fed buckles and begins to lower rates in response to a weakening economy) to drive further downside risk on stablecoin revenue. We note that in spite of materially slowing growth across revenue lines for Coinbase, the company hasn’t been able to keep a lid on total expense growth. Operating expenses spiked 51% y/y to $1.33 billion, driven by a ~2.5x y/y leap in sales and marketing revenue. The company boosted its performance marketing to attract new clients, while also paying out far more in USDC rewards (commensurate with stable coin revenue growth). Disappointingly, G&A spending (corporate overhead which I find to be the least productive component of opex) also grew 37% y/y to $394.2 million, well above revenue growth. Coinbase expense trends (Coinbase Q1 shareholder letter) The result of tremendous expense inflation has been a marked reduction in profitability. As shown in the chart below, Coinbase’s adjusted EBITDA declined -8% y/y to $929.9 million, or an overall 45.7% adjusted EBITDA margin that fell more than 15 points y/y relative to a much healthier 61.9% margin in the year-ago Q1: Coinbase adjusted EBITDA (Coinbase Q1 shareholder letter) Key Takeaways In my view, Coinbase is primed to correct downward again as it faces growth pressure in both its subscription/services revenue as well as its more volatile trading revenue. With the stock already commanding a ~8x forward revenue and ~16x forward adjusted EBITDA multiple despite moderating growth rates, I find Coinbase to be fairly valued at best, capping near-term upside. I’m happy to lock in my gains here and move to the sidelines, though I’m keeping my eye out for the next dip to re-enter.

Source: Seeking Alpha