Coinbase Global (COIN -0.79%) was one of many cryptocurrency stocks to win the hearts and minds of investors during the crypto boom in 2021.
But that boom went bust, and shares of Coinbase, a leading crypto exchange, plunged along with much of the rest of the sector. For some investors, the sell-off might seem like a buying opportunity.
Is Coinbase a buy today? To help answer that question, we asked two Motley Fool contributors for the bull and the bear cases for the stock.
Image source: Getty Images.
Coinbase has retained crypto loyalists from the boom times
Parkev Tatevosian: For my bull case on Coinbase, I will not suggest it will ever return to the height of its popularity during the early days of the pandemic. The confluence of factors in the aftermath of the outbreak was significantly in its favor. People were spending more time at home, their bank accounts were boosted by stimulus money, casinos were temporarily closed, and the Federal Reserve brought interest rates to zero.
As a result, Coinbase's revenue soared to $7.8 billion in 2021, up from $1.3 billion the year before. More impressively, its net income jumped to $3.2 billion from $127 million the year prior. That performance demonstrated Coinbase's potential when its revenue scales higher.
Unsurprisingly, the strong performance in sales and profits attracted investors to the stock. At its peak, it was trading at a price-to-sales (P/S) ratio of more than 18.
Of course, the popularity of cryptocurrencies, which Coinbase strongly relies upon, is nowhere near the peak. Revenue for the trading platform collapsed to $3.2 billion in 2022, down from the $7.9 billion in 2021 mentioned earlier.
To make matters worse, the company had scaled up its operations in preparation for sustained growth, which resulted in a net loss of $2.6 billion. Still, the revenue in 2022 was more than double that of 2020, suggesting that the company has kept many of the customers it attracted in the days of the crypto frenzy.
Date source: YCharts, COIN price-to-free-cash-flow
If Coinbase can scale back its operating expenses to the levels from 2020, profit could improve dramatically. Investors can buy the stock at a price-to-free-cash-flow ratio of 11.8, which is not a growth-stock valuation.
Coinbase might never be as popular as in 2021, but it doesn't need that to be a good investment.
Like crypto, but worse
Jeremy Bowman: When Coinbase had its initial public offering in 2021, a popular bull case for the stock was that the company would be able to make money both when cryptocurrency prices were rising and when they were falling.
However, that has proved to be anything but the case. Coinbase is dependent on crypto trading fees to make money, and naturally, users are more interested in trading when prices are rising. As token prices have fallen, the exchange's business has collapsed and the stock has plummeted to where it's now down more than 80% from its peak.
In 2022, revenue fell 59% to $3.19 billion, and the company reported a net loss under generally accepted accounting principles of $2.6 billion. Its loss measured by adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was $371 million. Trading volume was also down by half.
In response to the crypto winter, the company has announced multiple rounds of layoffs and other cost-cutting efforts, which should help cut its losses, but increasing the top line will be more difficult. In its forecast, management only said it aimed to reduce its adjusted EBITDA loss in 2023, a modest goal after a $371 million loss in 2022.
Coinbase has also talked about crypto cycles before, but it seems unlikely that interest in digital currency will again soon reach the levels seen during the height of the pandemic. That was a unique circumstance when people around the world were stuck at home, looking for new ways to pass the time and make money.
At this point, anyone interested in owning Bitcoin or a non-fungible token (NFT) probably already does. Brand awareness for cryptocurrencies is high, which means the market has matured, and it's going to be harder for Coinbase to attract new users.
The company also has another disadvantage. Whereas cryptocurrency tends to trade based on momentum, which can change at any moment, Coinbase has to make its business fundamentals work, which seems challenging now that interest in crypto has peaked.
Unless that changes, the path to success for Coinbase seems extremely narrow.
