Coinbase: A 'Panic In The Streets' Buy (Rating Upgrade)

Summary Coinbase reported a stellar Q4-24 with revenue just under $2.2 billion, significantly beating analyst expectations and my own estimates. Despite a 40% stock drop, I now see COIN as a compelling long-term investment, driven by stablecoin growth and diversified transaction revenue. Q4-24 saw a surge in transaction revenue from 'other crypto assets,' reducing reliance on Bitcoin and Ethereum, and boosting retail volume. Base network and stablecoin adoption could significantly enhance Coinbase's future revenue, particularly in merchant payments. Back in early-February, I gave an earnings preview for Coinbase Global, Inc. ( COIN ) and estimated the company would beat analyst expectations of $1.7 billion in Q4-24 revenue and report closer to $2 billion. My own analysis actually under-estimated Coinbase's beat as the company reported just under $2.2 billion in topline revenue last quarter. It was a terrific report for a company that I believe is getting very interesting. This is what I said in the closing section of that earnings preview: In my view, this makes Coinbase a really interesting long term investment idea on the thesis that stablecoins, and specifically USDC, will become a more important part of the global financial system. In spite of that, I'm still not ready to call the company a buy yet given what I view to be headwinds in the company's consumer transaction volume business, but that could change in the future if we see USDC continue to grow in supply and in usage. As fate would have it, those bullish COIN stock longer term now have a dramatically better entry after the stock has fallen by over 40% since my Q4 earnings preview: Data by YCharts COIN's two-month loss is more than double that of both Bitcoin ( BTC-USD ) and the broader equity market - though each of those have had dismal returns over the same time frame as well. In this article, we'll get into why I'm now upgrading COIN and have taken a small starter position in the company that I plan to hold long term. Q4 Earnings And Looking Ahead My own estimation of Q4 revenue from the Base ecosystem based on these third-party metrics puts 'other transaction revenue' somewhere between $52 and $72 million. Potentially bringing transaction revenue in Q4 right up to $1.4 billion. This quote above is from my Q4 earnings piece. I was sort of close on this. Revenue from other transactions came in at $67.6 million, and total transaction revenue toped $1.5 billion. Base revenue was in line with my expectation, but that $52-72 million range that I provided admittedly left a lot of room for error. Revenue Trend (Coinbase) Full year 2024 transaction revenue of just under $4 billion was a 162% increase over 2023 and Q4 was an enormous reason for that growth with 70.8% of Coinbase's Q4-24 revenue coming from transactions. Subscription and Services revenue growth, while terrific at 64% YoY, was not the largest driver of Coinbase's top line last year. Something that I didn't anticipate from Q4 was the surge higher in transaction revenue from 'other crypto assets.' Trading Revenue (Coinbase) At 49% in the quarter and 57% for the full year, Coinbase's transaction revenue is becoming less reliant on Bitcoin and Ethereum ( ETH-USD ). Collectively, those two assets resulted in 43% of Coinbase's 2024 revenue and just 37% of the company's revenue from Q4. BTC and ETH made up 52% of Coinbase's 2023 revenue and 42% in Q4-23. Coinbase's retail volume came back in a big way in Q4. At 21.4% of total volume, last quarter was Coinbase's largest volume participation from retail since Q1-22. Looking ahead, there shouldn't be much of a drop-off in transaction revenue given the exchange volume in Q1: Coinbase Volume Estimated Revenue January $158,960 $556.36 February $125,620 $439.67 March $102,080 $357.28 Source: The Block, millions Exchange transaction data has Coinbase's Q1 volume at $386.7 billion. If we assume a 0.35% margin on that volume - which would be in line with what Coinbase did in both Q1 and Q4 last year - transaction volume for Q1 should come in close to $1.4 billion before adding revenue from the Base sequencer. Base Network Data My view is that Base has the potential to be a much larger factor for Coinbase longer term. I take that view, in part, because of stablecoin growth and the role those products can have in payments for merchants. Peer-to-peer payments is an uphill climb due to the ease of use from platforms like Cash App ( XYZ ) or Venmo ( PYPL ), but merchants that use companies like Stripe to process credit card payments could save quite a bit annually by accepting USDC for payments. Processing Savings (AcceptUSDC) Consider what a small business that generates $10 million in annualized sales could save by eliminating credit card processing fees. The example above shows over $16,600 in monthly savings for a company that does half its sales with credit cards. Again, this is just a loose estimate, and it's certainly not a guarantee that Base would be the desired blockchain for USD Coin ( USDC-USD ) payments. Though I suspect Coinbase's stake in the coin's issuer Circle likely plays some factor. At $9.5 billion in token supply, Solana ( SOL-USD ) has more than double the USDC footprint that Base has. Yet, Base has been highly competitive in transfer volume. Stable Supply vs Volume (Artemis) The graphic above shows that Solana has grown the share of stablecoins relative to Base over the last four months. However, Base has been the top blockchain in the ecosystem for stablecoin velocity, with just under $4 trillion in stable transfer volume year to date. However, that transfer volume for Base has normalized more recently. Regardless, Base stablecoin supply continues to grow nonetheless: Base Stablecoin Supply (Defi Llama) With $4.2 billion in stables, Base is the fifth ranked chain by stablecoin footprint and the largest ETH scaling chain by stable supply. Importantly, almost 92% of this supply is USDC. Again, since Coinbase has an ownership stake in Circle, it behooves the company to incentivize USDC supply growth over other stablecoin products. Base Fees vs MAAs (Token Terminal) Admittedly, Base fees were down in March. For the full quarter, I'd expect somewhere between a 5-10% QoQ reduction in Base sequencer revenue. The important thing though is monthly active addresses are holding firm and averaged about 20.5 million monthly actives in Q1. For me, the main takeaway here is that users are still present, and stablecoin footprint is growing. Fees will be cyclical. But a user base that is sticking around a growing stablecoin supply are ultimately positive signs. Valuation Another positive sign in my view is the multiple compression we've seen in COIN stock. I've made no bones about calling COIN overvalued for quite some time, and it has been my primary reason for not taking a long-term position in the stock despite being encouraged by what I view to be a positive fundamental setup for Coinbase the company. Data by YCharts Look, I'm still not going to call COIN 'cheap' at forward sales and forward earnings multiples of 5 and 20 respectively. But the equity is trading at 52-week lows in both forward PS and PE multiples. With a valuation grade of 'D' from Seeking Alpha, there is still valuation risk in longing COIN at these multiples. The question is whether or not the company can grow into this valuation without too much stress on the equity price. Data by YCharts I think that could indeed happen. The company just had its best year by operating and net income since 2021 and the early indications from the publicly available trading data would imply Q1-25 should be another strong quarter for Coinbase. Investor Takeaways Data by YCharts The US equity market is still enduring a massive drawdown. The Nasdaq ( COMP:IND ) has fallen by over 25% in a little over one month. The primary risk to longing COIN after a 52% retracement from December highs would be that the global markets are in (or entering) a recession and demand for digital assets and cryptocurrencies would absolutely lose out to food and shelter when incomes are reduced or outright lost. To be clear, I do think this is a very legitimate concern. However, I question how much pain tolerance there will be from a market that is addicted to cheap money. The Federal Reserve may be pressured to lower rates and raise liquidity before a recession is evident in the economic data. COIN could certainly go lower, which is why I'm personally nowhere close to what I view as a 'full position.' But I'm comfortable in upgrading COIN from a 'hold' to a 'buy' after a strong 2024 and significant multiple compression in just four months.