Summary I'm upgrading Coinbase to a neutral rating on the recent spike in crypto prices, especially in altcoins where Coinbase generates higher trading spreads. Despite strong institutional participation, Coinbase's revenue heavily relies on volatile trading, especially in smaller altcoins. In my view, much of the recent upside price action in crypto is already priced into Coinbase's stock, with multiples of ~10x EV/FY25 revenue and ~20x EV/FY25 adjusted EBITDA. A pullback in crypto prices or trading volume will impact Coinbase sharply. I recommend staying on the sidelines here. 2025 is now upon us, and Bitcoin continues to flirt with the $100k threshold. Against this backdrop, shares of Coinbase ( COIN ) have soared over the past year (though it's ~25% off its high near ~$340), buoyed by the Trump re-election and the hope of a relaxed regulatory environment around crypto. But with Coinbase up ~65 over the past year (slightly below the performance of Bitcoin, up ~115% in the last 12 months, but outperforming Ethereum, up ~50%), we have to ask ourselves: can this rally really continue? Data by YCharts Higher crypto prices will help Coinbase in the short term, but can they last? I last wrote a bearish note on Coinbase in August , when the stock was hovering just below $200 per share, judging the stock's valuation to be too high amid revenue risks. While I admit that I missed out on ~30% gains since then, and didn't predict the Republican sweep in the November elections leading to a cryptocurrency bonanza, when I take a fresh look at Coinbase now near all-time highs, I find little to encourage me to invest in this name. However, we do note that higher coin prices are likely to benefit Coinbase: especially the surge in smaller-cap coins that make up a good chunk of Coinbase's revenue. With this in mind, I'm upgrading my viewpoint on Coinbase to neutral. At current share prices, I see more of a balanced bull-and-bear case for this company. On the positive side for Coinbase: Favorable regulatory environment for Coinbase. President Trump has publicly declared himself to be pro-crypto, which likely means that the regulatory environment will be more benign in a Republican administration. This may help move many more fearful investors off the sidelines and into crypto, especially if light regulation is introduced that can make casual investors feel more secure about the asset class. Growing institutional participation. Coinbase now generates the whopping share of its trading volume (though not revenue) from institutional clients. As crypto becomes more mainstream, the company may be able to draw more institutional participation and increase its revenue. Growing tax enforcement of crypto gains. The sting of tax may also eventually reduce short-term speculation and trading volumes and encourage more long-term investing. At the same time, however, we have to be watchful of the following risks: Coinbase is dependent on healthy crypto pricing, and more than half of the company's revenue is derived from very volatile trading activity. Though the company has more stable revenue streams coming from both subscriptions and blockchain mining rewards, more than half of its revenue is derived from trading, which varies widely from quarter to quarter as prices fluctuate. Most of Coinbase's trading revenue is derived from smaller altcoins. Moreover, not only does Coinbase rely on trading for its revenue, but the most lucrative spreads come from smaller coins, on which Coinbase benefits from larger bid-ask spreads. I'm of the belief that the crypto market will eventually converge to a few top coins, on which Coinbase makes a lower spread. Valuation checkup The tiebreaker for me, and the reason for my decision to remain on the sidelines, is Coinbase's already-hefty valuation. At current share prices near $310, Coinbase trades at a market cap of $64.43 billion. After we net off the $7.72 billion of cash and $0.871 billion of USDC on Coinbase's latest balance sheet against $4.32 billion of debt on Coinbase's latest balance sheet, the company's resulting enterprise value is $60.16 billion. This is the most conservative estimate of valuation: if we also give Coinbase credit for $1.26 billion of crypto assets held for investment on its balance sheet (marked as of the end of its September quarter; prices are likely higher now), the company's all-in enterprise value is $58.90 billion. For next year FY25, Wall Street analysts are expecting Coinbase to generate $6.12 billion in revenue, or 5% y/y growth (comping against a very volatile and successful trading year in FY24, alongside a sharp rise in crypto prices in the back half of FY24). If we assume the company can generate a 48% adjusted EBITDA margin against that revenue profile (equivalent to its YTD margins from Q1-Q3 of FY24), adjusted EBITDA would be $2.93 billion (+23% versus $2.38 billion in TTM EBITDA; the company has not guided to EBITDA in Q4 yet). This would put Coinbase's valuation multiples at: 9.6x EV/FY25 revenue 20.1x EV/FY25 adjusted EBITDA These are reasonable multiples for a growth stock. Yet, we also have to recognize that so much of Coinbase's performance depends on trading activity, and as we see in the recently released Q3 results (discussed in more detail in the next section), the company's financial health depends heavily on crypto prices and trading volumes, which nobody can predict. With this being said, I'm content to wait on the sidelines and adopt a watch-and-wait approach on Coinbase. Q3 download, and small-cap price jumps that will benefit Q4 Let's now go through Coinbase's latest quarterly results in greater detail. The Q3 trading trends are shown below: Coinbase trading volumes (Coinbase Q3 shareholder letter) Trading volumes more than doubled y/y, but declined -19% sequentially versus Q2. Importantly, it's in the institutional space (82% of the company's Q3 trading volume) that slowed down the most, down -20% sequentially (but still growing 132% y/y) likely due to both softer crypto prices as well as caution heading into the elections. Transaction revenue, meanwhile, declined -27% sequentially from Q2, a heavier hit than the sequential decline in trading volumes. To me, this exposes one of Coinbase's key risks: its reliance on alt coins for their higher spreads to generate revenue. We note that Bitcoin's share of trading volume jumped from 35% in Q2 to 37% in Q3, while USDT also gained 5 points of share, at the expense of altcoins, which shrunk to a 33% of trading volume. It's these assets that generate substantial revenue for Coinbase (38% of transaction revenue, versus just 33% of trading volume). Coinbase revenue (Coinbase Q3 shareholder letter) On the bright side, subscription and services revenue from staking rewards and interest didn't decline as drastically, down only 7% sequentially and highlighting the importance of this stable fee income. It also grew 66% y/y. Over time, Coinbase is hoping to roll out more of these value-added services to reduce its reliance on volatile trading revenue, which would be a strong upside driver for the stock. We note that Q4 should look a lot better for Coinbase. Bitcoin hovered in the $50-60k range throughout most of Q3, and has jumped to ~$100k in the wake of the election. Importantly, smaller-cap coins also gained, some with even sharper jumps than Bitcoin. Here's a look at price charts from XRP ($138 billion and #3 in size), BNB ($105 billion in market cap, #5 in size), and Dogecoin ($50 billion, #7), all taken from CoinMarketCap : XRP (Coinmarketcap.com) BNB (Coinmarketcap.com) DOGE (Coinmarketcap.com) The key question, and the primary reason behind my hesitancy on Coinbase, is the sustainability of this small-cap rally. The overall crypto market has reached ~$3.4 trillion in overall market cap (~$2 billion of which is BTC, and compared to ~$45 trillion for the S&P 500). Again, my long-term thesis here is that crypto market capitalization can continue to grow, but the market will consolidate into the largest coins like Bitcoin while altcoins stay flat or fade: and Coinbase generates smaller spreads on larger coins. On the profitability front, we note that Coinbase's adjusted EBITDA hit $449 million in the quarter, representing a 37% margin: down 4 points sequentially, but up 11 points y/y from 26% margins in the year-ago Q3. Coinbase adjusted EBITDA (Coinbase Q3 shareholder letter) Key takeaways All in all, I'm nervous that too much of crypto's recent surge has already been priced into Coinbase's stock, and that Coinbase is already priced for perfection amid all-time crypto and stock market highs. While I believe that the crypto market will continue to expand in the long term (particularly Bitcoin, at the expense of altcoins), I also believe volatility and speculation in the space will simmer down, especially as and when the new administration develops more clear policies around crypto regulation. Stay on the sidelines here and don't rush to buy Coinbase.
