Three Crucial Insights to Consider Before Investing in Coinbase's Shares
Coinbase (-1.16% in COIN) has been a rollercoaster ride, to put it mildly. From its debut on the market in April 2021 up until the end of 2022, it took a troubling plunge of 89%. Yet, since then, it's skyrocketed an impressive 801% (as of Nov. 12). Despite its recent positive trend, this leading cryptocurrency stock has continually experienced dramatic swings up and down.
With shares nearing their all-time high, potential investors might be considering a purchase. Before you leap in, here are three fundamental facts about Coinbase that are worth knowing.
1. Shifting focus for Coinbase
Coinbase started more than a decade back, primarily as a platform for Bitcoin trading. While the brokerage and exchange platform remains a pivotal part of the business, its role has decreased in recent times.
During the September 2022 quarter, Coinbase made $572.5 million from transaction revenue. This is generated from both individual and institutional investors. Unfortunately, this revenue figure has seen a sequential decline in two consecutive quarters.
Besides this, Coinbase's income comes from various sources such as subscriptions and services. This includes revenue from stablecoins and blockchain rewards, among others.
Management aims to transform Coinbase's revenue structure to a more reliable and consistent model. The volatility of crypto asset prices can negatively impact a business heavily dependent on trading revenue. By focusing on recurring revenue, the company aims to build a more stable entity.
2. Coinbase - a bet on the cryptocurrency industry
Coinbase plays an active role in various domains of the cryptocurrency market. Moreover, it directly invests in private opportunities, which are likely crypto-startups or digital tokens. As of September 2022, Coinbase had $700 million worth of such investments in its portfolio.
As a result, Coinbase can be seen as an investment in the growth and prosperity of the entire cryptocurrency industry. Only those who believe that crypto asset prices will rise in the long term and that the industry will become an integral part of our lives should consider investing in Coinbase's shares. It's challenging to envision a scenario where the crypto market grows significantly and yet, Coinbase fails to deliver substantial returns.
However, it's important to remember that blockchain and cryptocurrencies are still a relatively new technology. Consequently, the future of the industry is still fraught with uncertainty.
3. Soaring valuation for Coinbase
The significant increase in the overall crypto market in recent days suggests that investors are optimistic about what Donald Trump could bring to the industry during his second term as President. The exact meaning of this is unclear, but a more favorable regulatory environment could greatly benefit a company like Coinbase by making it easier and less expensive to launch new products and enter new markets.
Indeed, since the beginning of November (as of Nov. 12), Coinbase's stock has surged by 74%, reflecting the market's overwhelming optimism towards the company. Currently, Coinbase boasts a market cap of $80 billion.
Shares currently trade at a Price-to-Earnings Ratio of 53.6. This is significantly higher than the multiple of 26 just a couple of months ago. One might argue that the stock is currently overvalued, as investors seem to believe that an extraordinary success is imminent.
However, conducting a proper valuation exercise for Coinbase stock is challenging due to its highly unpredictable financial results on a quarterly basis. The crypto market could continue its meteoric rise, or it could face a sharp downturn. This volatility can be hard for investors to stomach.
If you're considering investing in this stock, the above points will give you a better understanding of its revenue mix, Coinbase's position in the industry, and the valuation perspective.
- As Coinbase aims to shift its revenue structure, focusing on recurring sources rather than relying solely on cryptocurrency trading, potential investors might be interested in understanding how their finance could be managed within this new model.
- Given that Coinbase invests in private opportunities within the cryptocurrency industry, those who believe in the long-term growth of cryptocurrencies might consider investing in Coinbase as a way to financially support and benefit from this emerging market, ensuring a diverse portfolio in their investing strategy.
