Summary Coinbase delivered strong Q4 results, beating revenue expectations and showing effective revenue diversification, but heavy reliance on crypto cycles remains a concern. Despite strong performance, I am not bullish on Coinbase due to competition, valuation concerns, and better historical returns from Bitcoin. The valuation appears attractive in optimistic scenarios, but cyclical fundamentals and competition risks make it less compelling. Bitcoin has outperformed Coinbase stock in several time frames, highlighting the opportunity cost and execution risks associated with investing in Coinbase. Coinbase ( COIN ) is a company that I consider to be very solid. They offer a good quality service, have a good level of trust, and are one of the most reliable options for crypto exchanges. Apart from these structural characteristics, the company delivered strong Q4 results , beating its own revenue outlook and by a lot of the market estimates . This quarter also adds more clarity to revenue diversification, which is very positive for the long-term shareholder who isn't just trading COIN stock alongside crypto cycles. Despite these positive factors, I don't think it makes sense to buy Coinbase at the moment. Among the 3 main reasons why I'm not bullish on the stock are: 1. competition, 2. valuation, and 3. in most periods it was more worthwhile to have bitcoin instead. Q4 Was Really Strong For Coinbase I believe that most of the market was already expecting a strong result from Coinbase, mainly due to the higher crypto transactions in the period, which is the exchange's main driver. Transaction revenue went from ~$572 million in Q3 to $1.55B in Q4. Additionally, the company mentioned that by February 11, $750 million in transaction revenue had already been generated. To get a sense of how much that is, in Q4 2023 the entire revenue was $905 million. One of the main risks and non-appealing side of the thesis is its strong dependence on this revenue, which varies according to crypto cycles. To get around this, there is the subscription and service revenue. The company's own outlook was for subscription and service revenue in the range of $505–580 million in Q4. What was delivered was $641 million. This in itself is quite bullish for the thesis, since the efforts made by management to diversify revenues have been effective, but also, the company has already mentioned that the outlook for Q1 is subscription and services revenues of $685–765 million. Coinbase’s Shareholder Letter In the earnings call , it was mentioned that 2025 will be a year of building the foundations, further expanding leadership, offering better services such as “best-in-class derivatives trading”, increasing international presence, and other initiatives. “So 2025 is going to be about growing revenue with our existing products. It's going to be about driving utility in these new categories where crypto is getting to scale, and it's going to be about building the foundations to power this next decade of growth.” As for Adj. EBITDA, it was $1.28B in Q4, surpassing the entire 2023 figure. Margin was 58%, which shows the company's ability to scale. In short, Q4 shows that Coinbase really does have the potential to monetize the crypto bull market, achieving large revenues and good margins. More than that, the company also shows that it continues to care about diversifying this revenue and reducing its dependence on transactions. Addressing The Competition Problem For Coinbase Well, it may seem a bit contradictory, but even though I think the company is good, with good momentum, and with the management taking good initiatives, I'm still not bullish on the stock. But this is due to a few clear points. Starting with competition, it ends up being related to another problem, the dependence on trading volume. In Q3, the trading volume was $185B, and in Q4, it was $439B. As much as the crypto bull market still has prospects to continue, and it is diversifying to other revenues and crypto (such as stablecoins like USDC), if this trading volume starts to slowly decline, it would already be bad for the shareholders, eventually pressuring operating leverage (consequently reducing margin) and revenue. What does this have to do with competition? Well, today, as much as Coinbase has a differentiated and better-than-average service, several fintechs offer the service of buying crypto. Mercado Pago from Mercado Libre ( MELI ) offers crypto trading services. Nu Holdings ( NU ) also offers this type of service as well as swaps . Inter ( INTR ), Robinhood ( HOOD ), and several other platforms are also eyeing this market, not to mention traditional exchanges such as Binance. The fact that the company has quality, is already recognized by trust, and offers a more complete service, ends up reducing this risk, but the problem is that for the valuation to make sense it needs to maintain this growth, and this depends not only on a crypto bull market, but also on it being able to continue growing in clients, trading volume and other services, but this with several players trying to get the same customer, makes the outlook much more uncertain. Addressing The Valuation “Risk” Coinbase's valuation is not a big problem. In fact, it's even attractive depending on the scenario you project, with the potential to be found at very high earnings yields if you consider maintaining this bull market in conjunction with steady growth in subscription and services revenue. For this exercise, I considered an optimistic scenario, to see how the company would fare in a market that is still very hot for crypto. If we annualize Q4, we have a transaction revenue of an incredible $6.2B. Let's assume that in 2027 the market will still be as hot as it was in Q4, so Coinbase will be able to achieve this $6.2B in revenue. For services revenue, if it consistently manages to advance by 20% per year (which is difficult, since it also depends on the crypto cycle in parts, as for cross-selling), in 2027 this revenue would reach $4.4B. If it reaches a 70% EBITDA margin, that implies an EV/EBITDA of 9.5x. When I was doing this exercise, I expected to find very low multiples, since the assumptions were very optimistic. Author (Kênio Fontes), Coinbase That sounds great, right? If you believe that the fair multiple is 20x given the quality and growth potential, that's already 100% upside in a few years. The problem is that this is just an exercise, trying to see what would happen in a year that continues to be good for the crypto market. In practice, this shouldn't happen in all of them, given the cyclicality. If we keep subscription and others revenue at $4.4B, if transaction revenue falls to $3B, and the margin returns to something close to 50%, the EV/EBITDA would already be 19.2x. It's also worth mentioning that this adj. considers SBC, so in practice the shareholder value is lower than that, given the dilution. Even though 10x EBITDA seems attractive, in fact, I don't find it's enough to justify the risks of the thesis: Fundamentals that are still quite cyclical, dependence on the crypto bull market, risk of competition, and the opportunity cost of buying Bitcoin directly instead. Bitcoin Did Better Than Coinbase Finally, let's see how Bitcoin performed against Coinbase stock. It's almost obvious that the price of Bitcoin and the price of Coinbase have a certain correlation. That's because crypto trading volume, in general, is still very much connected to Bitcoin, and even in Q4, when there was some diversification, Bitcoin accounted for around 27% of total trading volume (having dropped 10 percentage points from Q3, which particularly surprised me). The problem with this correlation is not that it exists, but that Bitcoin ended up performing better than Coinbase in different time frames. Since COIN's IPO, it has shown a total return of -9%, while BTC has gained over 55%. Koyfin In the 3-year window, BTC’s gains were +127.35% and COIN’s was +53%. In 6 months, BTC was up +64% and COIN only +55%. The exception is the 1-year period, when Coinbase obtained returns of 102% and BTC of 94%. One may argue that these periods are too short, and Coinbase, unlike Bitcoin, gives you exposure to a company that generates cash flow and also has a lot of potential to monetize trends in different cryptos, and its diversification brings greater stability to these returns. All this is true, but I still see this as a risk, as it is linked to other uncertainties. While Coinbase depends on the Bitcoin cycle, Bitcoin does not depend on Coinbase. If you have Bitcoin, you probably will have a return correlated with Coinbase, but you are not exposed to the company's execution risk, you are not exposed to competition risk, and so on. Of course, as already mentioned, there are scenarios where Coinbase can perform better than Bitcoin and with even less volatility, but for now, this is still very correlated, and therefore, especially with the current valuation, it seems to make little sense. The Bottom Line In short, I believe not only in Coinbase's potential but mainly in the company's quality. There is still a lot of room for improving fundamentals with diversification, and this should unlock shareholder value in the next few years. Still, the risks here are clear, and make the stock less attractive, such as the high dependence on the crypto market, a valuation that depends on steady growth to reach attractive multiples, and the opportunity cost, since Coinbase has shown a strong correlation with Bitcoin in recent years, but with a lower return.
