Coinbase will release its Q3 2024 results on 30th October. Analysts expect Q3 revenue to grow 86.1% YoY to $1.25 billion and GAAP EPS of $0.38. Management has guided Subscription and Services revenue in the range of $530 million to $600 million, representing YoY growth of 69% at the midpoint.
We entered Coinbase primarily based on technical analysis. Coinbase’s fundamentals are not a reliable indicator of future performance. Instead, asset prices and volatility in crypto are more important than traditional fundamentals.
Technical analysis shows a potential for a pullback, and if so, we will be watching $160 to $170 for our next potential tranche. Given the election is next week, anything can happen and if the setup changes and the stock does not pullback, then Advanced members will be updated in our weekly webinar as to the plan.
Revenue
The company’s revenue growth rate is expected to slow as it laps tough comps more often than a typical growth stock. By virtue of Bitcoin and crypto reaching a new high in March 2024, the company is expected to see negative growth of (-14.3%) the following year in the March quarter of 2025. The current estimates suggest a bottom in Q1 2025. Notably, on a sequential basis, revenue is expected to increase from Q3 2024 to Q2 2025.
- Q2 revenue grew by 104.8% YoY to $1.45 billion.
- Analysts expect Q3 revenue to grow 86.1% YoY to $1.25 billion and 41.8% YoY to $1.35 billion in Q4.
- Analysts expect 2024 revenue to grow 83.1% YoY to $5.69 billion and 2025 revenue to grow 3.3% YoY to $5.88 billion.
- Revenue is expected to decline by (-7.2%) YoY to $5.45 billion in 2026. Analysts shy away from predicting too much growth in either direction in the next few years, which is why technical analysis matters quite a bit with Coinbase.
Margins
Margins have widely fluctuated with revenue. The company also implemented an accounting change in Q1 2024, wherein they will report the fair value of their crypto assets. This means that the company will report unrealized profits or losses based on the crypto prices at the end of the quarter.
- Q2 operating margin was 23.7% compared to (-10.4%) in the same period last year. Operating expenses increased 26% QoQ to $1.1 billion due to unrealized losses in Q2 compared to gains in Q1 and higher marketing and policy spending.
- Technology and administrative expenses are expected to increase in Q3 due to uneven stock-based compensation recognition, while marketing expenses will increase due to increased online marketing spending.
Management stated, “We expect Q3 transaction expenses will be in the mid-teens as a percentage of net revenue. We expect technology & development and general & administrative expenses to increase Q/Q to $700-$750 million, largely driven by the non-linear expense recognition of our stock-based compensation.
Finally, we expect sales and marketing expenses to increase Q/Q to $160-$210 million, primarily driven by higher variable digital marketing.” The company also plans to increase its headcount in the second half of the year to support product and international expansion.
- Net income was $36.1 million or 2.5% of revenue (includes $319 million in pre-tax crypto assets losses vast majority of which were unrealized as crypto prices were lower at the end of Q2 compared to Q1) compared to a net loss of (-$97.6 million) or (-13.8%) of revenue last year.
- Adjusted EBITDA was $595.55 million or 41.1% of revenue compared to $188.73 million or 26.7% of revenue in the same period last year.
EPS
EPS has been lumpy in the past as discussed in the above paragraph. It is expected to increase sequentially in the next few quarters.
- Q2 GAAP EPS was $0.14 compared to (-$0.42) in the same period last year.
- Analysts expect Q3 EPS to be $0.38 compared to (-$0.01) in the same period last year. Q4 EPS is expected to be down (-35.6%) YoY to $0.67.
- 2024 GAAP EPS is expected to grow 1413% YoY to $5.6 and down (-4.6%) YoY to $5.34 in 2025 due to high comps.
- 2026 EPS is expected to decline by (-36.5%) YoY to $3.39. This will be highly dependent on crypto’s performance, however, and the subsequent trading volume.
Cash Flow and Balance Sheet
The company is generating strong cash flows. Coinbase’s cash flows have seen a remarkable turnaround, from (-51.6%) in 2022 to 27.7% in 2023.
- Free cash flow was $484.2 million or 33.4% of revenue compared to $151.1 million or 21.4% of revenue in the same period last year.
Cash was $7.23 billion, and debt of $4.23 billion, compared to $6.7 billion and $4.23 billion in Q1. The company issued $1.3 billion of convertible notes in Q1 and plans to use the net proceeds of $1.1 billion to repay the outstanding debt at or before maturity, depending on market prices. Management also clarified in the earnings call that the other reasons for maintaining large cash balances were to support the ETF launches and for potential investment opportunities, both organic and inorganic.
Alesia Haas, CFO, answered the analyst's question on the cash build-up. “Yes, we're really pleased with the balance sheet strength. We are using cash, as we've mentioned in our prime financing business. A large amount of that cash was used to support the ETF launches in Q1 and Q2 with the Bitcoin ETF and now hopefully be a Ethereum ETF where you can see a lot of day-to-day or week-to-week volatility of those loan balances. We did grow prime financing fees within the quarter. And so you can see while the balance at the end of quarter was down versus of Q2. We saw growth intra-quarter for those balances. So using our cash to support our products is a primary use case for us.”
Key Segments:
Coinbase’s Q2 transaction revenue grew 138.7% YoY and down (-27%) QoQ to $781 million. Crypto asset volatility declined approximately (-13%) compared to the Q1 average, resulting in softer crypto spot market trading in Q2 compared to Q1.
We covered these segments in detail in a recent deep dive.
- Within Transaction revenue, Consumer is the main driver at $664.8 million, up 130% YoY, compared to Institutional revenue of $63.6 million, up 272% YoY.
- Base and payment-related revenue has been reclassified to other transaction revenue. It grew 149% YoY to $52.5 million. Improved efficiency and reduced fees led to the number of base transactions growing 300% sequentially.
- Management stated they saw $210 million in transaction volume for July, pointing toward mid-$600 million for transaction revenue. This compares to $110 million in July of last year.
Q2 subscription and services revenue grew by 78.6% YoY to $599 million. This is an all-time high for Coinbase in this segment and helps to diversify from being entirely dependent on transaction revenue. The growth was due to stablecoin revenue and blockchain rewards revenue; it also benefitted from a one-time blockchain validator reward of $8 million. Management guide for Q3 is $530 million to $600 million, representing a YoY growth of 69% at the midpoint.
- Stablecoin revenue grew by 58.8% YoY to $240.4 million. This was primarily helped by higher average USDC on-platform balances and higher average USDC market capitalization.
- Blockchain rewards revenue grew by 111.3% YoY to $185.1 million. This segment opens an exciting opportunity as interest rates go lower. Staking yields are not determined by FOMC policy; instead, by the participation rate of coins being staked. As demand increases for crypto, yields will increase to entice more coins to be staked. As a non-correlated yield to traditional financial instruments, which are mostly tied to central bank policy, this creates an opportunity for portfolios to diversify incomes in an interesting way, and adoption should increase as rates go lower.
- Interest and finance fee income grew by 33.7% YoY to $69.4 million. This segment is tied to interest rates, Coinbase offers loans against the coins being held in-house. This is unlikely to be sustained now that the FED has lowered rates.
- Custodial fee revenue grew by 102.9% YoY to $34.5 million.
- Other subscriptions and services revenue grew by 153.1% YoY to $69.6 million.
Other Key Points to Watch:
Regulatory Changes
Improving regulatory clarity is another catalyst for the stock in the near term. With the elections around the corner, both candidates show support for crypto. Management was also optimistic about the regulatory clarity during Q2 results.
“In Q2, we made extraordinary progress towards driving regulatory clarity in the US and around the world. Crypto legislation has become a mainstream issue in the US, garnering bipartisan support, and there is real energy within both the House and the Senate to pass meaningful legislation. We continue to support Stand With Crypto – which now has over 1.3 million advocates – and will continue to invest in policy initiatives throughout the 2024 election cycle to help elect pro-crypto candidates. The approval and launch of the ETH ETFs was another huge step forward for regulatory clarity as it confirmed what we have been saying for years: ETH is not a security. Outside the US, we saw USDC become the first stablecoin to achieve compliance with the European Union's landmark Markets in Crypto-Assets (MiCA) regulatory framework.”
Institutional Adoption
For institutions, there is a product called Coinbase Prime. This full-service prime brokerage platform facilitates trades and custodian services for large institutions. Management has stated that institutions have maybe 1% to 3% of their funds in crypto. This is a low allocation, which has a lot of potential for growth. Management has mentioned that lack of regulatory clarity is the main hindrance for more institutional adoption.
Brian Armstrong, Co-founder and CEO, said in the Q2 earnings call, “90% of institutional investors say regulatory clarity would boost their confidence in investing more in crypto. For these reasons, Coinbase will continue to push for clear rules in the courts, in Congress and in the November elections.”
He further answered in Q&A, “Well, I think you're right that the lack of regulatory clarity is probably the biggest blocker for institutions to put more and more funds into crypto. We have a huge number of them as clients in Coinbase Prime, our institutional product. And when I meet with them, they'll often say, we've got 1% or 2% or 3% of their funds in some portfolio, holding in crypto. And I asked them, what would it take for it to be 10, 20, 30, and they all say regulatory clarity.”
Derivatives
Coinbase has primarily been a spot trading exchange, where crypto traders buy the asset at current market prices. In November of 2023, Coinbase added derivatives trading, which will help the exchange participate in a higher percentage of trading activity. Derivatives trading is roughly 2/3 of all crypto trading compared to spot trading at 1/3.
Management mentioned during the Q2 earnings call that the company’s focus has been on adding users and growing market share. This has included additional contracts and margin trading for crypto futures. The derivatives market is expected to be an important growth market in the future.
Valuation
Coinbase is trading at a P/E ratio of 37.7 and a forward P/E ratio of 38.9. P/S ratio is 12.3 and a forward P/S ratio of 9.3. It is trading above its average P/S ratio of 8.5.
Technical Analysis
By Portfolio Manager Knox Ridley
Like Bitcoin, Coinbase has been in a correction since March of 2024. Based on the lack of a clear trend, and on-going overlap, there are numerous interpretations of the current price action. Below, I present the three most likely, along with what levels need to hold/break to confirm each.
- Green – The correction that started in March is a 4th wave that ended in early October. The final 5th wave is tracing a large degree 3 wave uptrend (A,B,C). This means that the path higher will not be a typical, direct move, but an overlapping push higher. If this is playing out, we will see a correction start soon, which will hold over $170 – $160. If this happens, the general target for the next leg higher will be around $280.
- Blue – We will see a gap higher on heavy volume that breaks above $235. This means that the 4th wave correction ended in August and we are further along in the final swing higher. We should push toward the $280 region before seeing our first larger correction within this new uptrend.
- Red – We break below $170 – $160. This will indicate that we are still in the 4th wave, which will be targeting $128 – $95.
Conclusion
Coinbase’s move into the derivatives market and its role as a trusted custodian for institutional investors in the crypto space, will continue to entice institutions to its platform. The regulatory clarity is another catalyst to watch in the near term. We continue to successfully navigate the crypto volatility by using technical analysis.
Reference our recent deep dive “Coinbase: Base Layer 2 and Derivatives Make a Case for a More Durable Business Model.”Coinbase: Base Layer 2 and Derivatives Make a Case for a More Durable Business Model.”
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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