Summary Coinbase's inclusion in the S&P 500 and strong Q1 results reinforce my Buy rating, with intrinsic value at $366 per share. Despite a 10% QoQ revenue decline, non-cyclical revenues grew 9%, showing resilience and forming a stable core business. Future outlook includes potential growth in crypto-based derivatives, smoothing cash flows, and supporting long-term valuation. Risks include market volatility and evolving trade deals, but Coinbase's proven sturdiness and attractive pricing make it a confident Buy. Coinbase ( COIN ) just announced Q1 earnings , and the S&P 500 just announced its inclusion in the titular Index. The market has received both events very well, and the stock was up 24% on May 13th. Yet, COIN is still cheaper compared to my previous Buy rating in February, which I have decided to reiterate today on their strong results. Summary of Previous Thesis Feeling uncertain about the future of crypto, I believed Q4 2024 marked a watershed moment. This was not simply because of their strong operating results on the trading volume that followed Trump's victory. As he ran on a pro-crypto platform, this marked a major shift toward widespread adoption of crypto, for a major exchange such as Coinbase to benefit tremendously. Author's previous calculation As I was previously concerned about the cyclicality of their transaction-based revenue (which is most of their revenue), I was more willing to raise my estimate of baseline FCF going forward. This gave an intrinsic value of $366 per share as a long-term investment, prompting my Buy rating. Q1 Updates One of my biggest concerns was that the bearishness in the markets would have crushed the revenues of an exchange like Coinbase. After all, their volume tends to rise as prices of Bitcoin ( BTC-USD ) rise, and Q1 had a rough go with that. BTC 6M Price History (Seeking Alpha) Seen above, BTC fell about 20% from its Q4 highs, where it broke the $100K price barrier for the first time. Q1 2025 Shareholder Letter Total revenue came in at $2B. While this did represent a QoQ decline of 10% from Q4 2024, this is actually pretty good, considering Q4 was their best ever. They showed resilience in a time when their customers would have been frightened. Q1 2025 Shareholder Letter This was largely driven by a decline in the cyclical transaction-based revenue. Crucially, their non-cyclical revenues grew 9%, indicating that they are forming a stable, core business. Cash Flow Statement (Q1 2025 Form 10Q) Cash flow, however, went negative when compared to the prior-year quarter, driven primarily by lower net income from higher operating expenses across the board. S&P 500 Index Inclusion The S&P 500 announced on May 12th that COIN will join the Index next week. This will cause it to replace Discover ( DFS ), which is undergoing a merger with Capital One ( COF ). Index inclusion leads to buy orders by funds that track the Index, driving the price up in the short term. Long-term, this means COIN is also more likely to follow trading patterns of the entire Index. Its short-term price movement may be influenced more by trends of companies such as Mag 7. Folks who have been using older trends (such as the price movement of BTC) to track COIN will need to take that into account. Future Outlook Of course, I don't make Buy recommendations based on trading. I do those based on what I think is a good price for the business. As the cash flow was negative this quarter, I want to let more of the year play out and not let potential seasonality or one-offs mire my last Discounted Cash Flow valuation. The basic outlook, from management's remarks in the earnings call , seems to be the following: Last, our Q2 outlook. Macro uncertainty including around global trade policy may contribute to softer crypto trading markets and lower asset prices as we enter the second quarter. We have navigated choppy markets before, and we are confident in our ability to maintain our long-term product road map and remain financially disciplined. As well as: With regards to our institutional transaction revenue, as I mentioned before, we are focused on growing the derivatives trading market share, and we plan to continue our investments in trading incentives. We anticipate a $30 million to $40 million quarter-over-quarter impact in Q2. I think it's likely that Q2 will also not be as big as Q4 2024, but seeds of growth are still being planted. Long-term, I actually think crypto-based derivatives will be an ace up their sleeve. I recently covered CBOE Global Markets ( CBOE ), which essentially controls the options market in the United States. Bull markets usually benefit exchanges and brokers, who benefit from the increased volume of the stocks themselves. As derivatives can be purchased for both sides, bulls and bears, CBOE's model gives them durable counter-cyclicality. I believe Coinbase is developing this capability as well and that it will contribute to smoother cash flows over its lifetime. This enhances my previous thesis that mainly focused on their growing subscription services as the foil to cyclical, lumpy cash flows. With all that said, there's not enough of a change in Q1 to revise my valuation, and I maintain that $366 is a fair value for a 10% discount rate (typical return of a market index), marking strong signs of valuation for COIN, especially compared to last time. Risks Let's not count our eggs before they are hatched. Markets have only recently recovered from the pessimism of the Trump tariffs and trade wars. This follows recent news that tariffs could be reduced , as a first step toward a larger, more meaningful trade deal with China. Similar improvements in trade deals with the UK were also announced . None of this is permanent, and the trade deals are an evolving situation. The rest of 2025 remains uncertain. If markets sour again, COIN could post weaker quarters. This could cause their price to drop, and as they only narrowly made it into the S&P 500, removal of their market cap decline sufficiently could lead to an exaggerated price drop. Weaker quarters may also spell weaker cash flows and lower DCF valuation overall. Conclusion Sometimes an analysis isn't about what changed, but what didn't change. Q1 required Coinbase to navigate the first half of the recent fear that dominated financial markets. While there was an observable impact, they weren't heavily damaged by it, and other components of their business continued with quarter-over-quarter growth. Coinbase proved its sturdiness. Now, with a better discount than February and more experience on its belt, I am more confident that COIN is an attractively priced Buy.
