Coinbase Global, Inc. (COIN), one of the largest cryptocurrency exchanges in the world, reported blowout earnings for the second quarter of 2021, supported by the increasing popularity of Bitcoin and other cryptocurrencies among retail investors.
Coinbase debuted on Nasdaq on April 14, with an IPO reference price of $250. The stock opened at $381, and then reached its all-time high of $429.54, before closing at $328.28. (See Coinbase stock charts on TipRanks)
Coinbase stock failed to gather any momentum in the months that followed, primarily due to the regulatory scrutiny on digital assets. The company, despite the short-term challenges, seems well-positioned to report strong earnings growth in the next few years.
Coinbase reported diluted earnings per share of $6.42 for the second quarter, handsomely beating estimates of $2.82. Revenue came in at $2.03 billion for the quarter, up 1,040% in comparison to the second quarter of 2020.
The trading volume on the Coinbase platform increased quarter-over-quarter, from $335 billion to $462 billion. Bitcoin accounted for just 24% of total trading volume in the quarter, down from 39% in Q1. This is a promising sign, as long-term earnings depend on Coinbase’s ability to emerge as a one-stop service provider for crypto investors and traders.
In the first six months of 2021, Coinbase added 29 new cryptocurrencies to its platform, increasing the total number of tradeable cryptocurrencies to 83.
The Path to Long-Lasting Competitive Advantages
For a company to consistently report economic profits over a long period of time, competitive advantages are a must.
It is evident that Coinbase is already benefiting from its strong track record as a reliable cryptocurrency services provider, which has allowed the company to charge higher-than-average fees.
To strengthen its foothold, Coinbase is strategically expanding its horizons by introducing innovative solutions such as cryptocurrency-backed loans and debit cards. As one of the first companies to offer these solutions, Coinbase is likely to attract a loyal customer base, which is the first step towards increasing the switching costs faced by customers.
These switching costs could help Coinbase develop a strong economic moat.
The Industry Outlook
The industry has faced many challenges since emerging as a major asset class, including regulatory scrutiny and cyberattacks. The regulatory landscape has improved in the last couple of years, but many hurdles limit the adoption of cryptocurrency.
Many investment management companies have applied for the approval of the U.S. Securities and Exchange Commission to operate crypto-backed exchange-traded funds in the last three years, but the SEC has yet to approve any of these products.
The first-ever ETF backed by physical gold was launched in 2003, leading to a sharp rise in gold prices as interest in this asset class grew exponentially. Investors are expecting a similar boost to cryptocurrency prices when the SEC gives the green light for crypto-backed ETFs, but fund managers at Osprey Funds believe this will not happen at least until 2022.
The increasing rate of cyberattacks on crypto wallets is another major concern that needs to be addressed, for this industry to gain the trust of investors and consumers. Crypto investors lost more than $80 million between October 2020 and March 2021, as hackers gained unauthorized access to digital wallets.
Coinbase has invested millions of dollars to safeguard client assets, but as long as hackers gain access to crypto wallets designed by other companies, the industry is likely to remain under pressure.
Despite these challenges, cryptocurrency is gaining traction because of the decentralized nature of this asset class, which transfers the power from regulators to consumers. It should only be a matter of time before security threats are identified and nullified, and the approval of the first-ever crypto-backed ETF is also likely to happen in the next couple of years.
Wall Street’s Take
Coinbase scores a Moderate Buy consensus rating among analysts, based 10 Buys, three Holds, and one Sell. The average COIN price target is $362.00, which implies upside of 38.6% from the current market price.
It would be reasonable to expect above-average volatility from Coinbase stock, but since the company is moving in the right direction, shareholders are likely to be winners in the long run.
Coinbase reported blowout earnings for the second quarter, and the company is well-positioned to thwart the competition and report economic profits over time. Despite the volatility, Coinbase shares look attractive today.
Disclosure: Dilantha De Silva did not own any shares mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
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