Coinbase Is Soaring But My Thesis Has Broken Down (Rating Downgrade)

Summary I am downgrading Coinbase to a neutral rating due to the stretched valuation and slowing growth in its subscription business. While subscription and services revenue remains the company’s crown jewel, transaction revenues are highly cyclical and face long-term pressure to zero. The recent stock rally appears overdone, as USDC adoption has not grown proportionately and transaction revenue growth is set to decelerate. Despite strong cash reserves and strategic M&A, I see limited upside at current prices and caution against extrapolating recent transaction revenue surges. Coinbase Global ( COIN ) has emerged as a big winner in stablecoins, or at least that is what the stock market action is signaling. The company has continued driving both aggressive top-line growth and profitability, with its valuable subscription business retaining the biggest shine. I caution investors that the transaction revenue business is arguably very cyclical, with this being ever-important given that it still makes up the majority of the overall business. The stock valuation looks stretched after the recent rally, as USDC adoption has not increased proportionately to support that surge. I am downgrading the stock to a neutral rating. COIN Stock Price I last covered COIN in April, where I upgraded the stock to a buy rating due to the strong momentum in the subscription businesses. The stock has more than doubled since then. Data by YCharts It’s always fun to be proven right, but I question how much of this rally is really deserved. COIN Stock Key Metrics COIN is a cryptocurrency brokerage that has become a household name in part due to innovation as well as its resilience through various crypto cycles. The latest quarter saw the company continue to show solid top-line growth, with revenues growing 23% YoY. I note that the company is lapping tougher comparables as it saw 115% YoY growth in the first quarter of 2024. 2025 Q1 Shareholder Letter Those tough comparables are manifesting largely for the transaction revenue business, which grew by just 17.3% YoY. I note that transaction revenues stood at just $375 million in the first quarter of 2023 after peaking at $1 billion in the first quarter of 2022. I expect transaction revenue growth to moderate moving forward and prove rather cyclical, especially as it faces long-term pressures to zero. The subscription and services business saw revenues jump by a stellar 37% YoY in the quarter (albeit at the low end of guidance). I continue to view this to be where most of the value resides for this company, given the long-term secular drivers in the stablecoin business. 2025 Q1 Shareholder Letter The company saw profit margins contract in spite of the aggressive top-line growth in large part due to a significant uplift in sales and marketing expenses. The company has been investing heavily in promoting the USDC stablecoin. That investment makes sense as I view the stablecoin environment to in the “land grab” phase. 2025 Q1 10-Q COIN ended the quarter with $9.9 billion in cash and investments versus $4.2 billion in debt, representing a solid net cash balance sheet. 2025 Q1 Shareholder Letter Looking ahead, management guided for the second quarter to see around $640 million in subscription and services revenue at the midpoint, representing just 6.8% YoY growth. That guidance surprised me, as I expected the company to sustain aggressive growth in this segment for at least several more years. 2025 Q1 Shareholder Letter On the conference call , management discussed how their acquisition of Deribit would further bolster their product offerings through options products. I found the most interesting thing about the acquisition to be the source of funding, which would mainly come from issuing new shares. Management noted that while they had an outstanding share repurchase program, they were instead prioritizing M&A. I view this capital allocation policy to be unusual but in a good way, as this is exactly the right approach to take when the stock is trading at elevated levels. Is COIN Stock A Buy, Sell, or Hold? COIN has seen a furious rally largely stemming from the passage of the stablecoin bill in the Senate , which in effect legitimizes the industry. Perhaps investors are hopeful that this momentum can help the company accelerate the projected subscription revenue growth, which, as previously mentioned, is expected to greatly decelerate in the coming quarter. That said, I note that the USDC market cap has not increased meaningfully over the last several months , making the violent rally look rather misplaced. The stock might not look expensive trading at 12x sales. Seeking Alpha The key point to ponder is that over 60% of the overall business is still coming from transaction revenues, which I view to be highly cyclical and thus warranting a lower multiple. The subscription revenue business looks similar to the services business at Apple ( AAPL ), but with growth projected to slow down rapidly, I no longer believe it is worth such an aggressive multiple. Assuming a 10x sales multiple for the subscription business, which looks generous given the 6.8% projected growth rate in the second quarter, we arrive at $25.6 billion in market value. That leaves $65 billion in value for the transaction revenue business, valuing that at around 12x to 13x sales, which is a stunningly aggressive valuation. I find it likely that crypto transaction fees decline eerily close to 0 over the long term, similar to what we have seen in equities trading. Robinhood ( HOOD ) is already offering zero commission fees, and I expect them and others to help bring fees down lower as competition increases for the crypto giant. Based on a 5x sales multiple for the transaction revenue business, I am updating my fair value to a $50 billion market cap, representing a stock price of $202 per share. I note that while I am unconvinced by the current valuation, the recent IPO of Circle ( CRCL ) is clearly a positive for the name and may lead to some near-term momentum in growth rates, similar to what we have seen take place for Reddit’s ( RDDT ) growth rates in social media following their IPO. COIN was the original founder of the USDC stablecoin, but due to desires to help CRCL come public, it has changed its ownership structure to instead be one in which it earns 50% of interest revenues. That agreement is renewable every 3 years for what looks like eternity , and it looks like there isn’t any easy way for CRCL to back out of that agreement. While it is possible that CRCL ends up trying to take this to the courts at some point in the future, this is not a material risk at the moment versus the valuation issue that I am more focused on. COIN Stock Conclusion COIN keeps on surging, and the valuation might not look so expensive to those new to this story. I caution that the surge in transaction revenues over the last couple of years should not be extrapolated over the long term due to rising competition. The subscription and services business is rightfully considered a jewel, but the stock has run too fast and too far. COIN is likely to be a prime beneficiary of increased stablecoin adoption, but for now it is coming at a cost to profitability. I recommend investors to look harder for cheaper alternatives among high-quality growth stocks, as I have done for the Best of Breed Growth Stocks Portfolio . I am downgrading the stock to a neutral rating.

Source: Seeking Alpha