Regulatory Clarity and Strategic Positioning Set Stage for Long-Term Growth
Since the meetings with legislators in May, it has become increasingly evident that Coinbase stands to gain significantly if former President Donald Trump is re-elected. Trump’s ongoing participation in Bitcoin conferences only strengthens this perspective. With fair treatment of industry actors and the implementation of sensible, predictable regulations, blockchain adoption is expected to continue its upward trajectory. This is especially likely as more traditional financial (TradFi) powerhouses enter the space. Increased regulatory clarity, combined with adoption and potential inclusion in the S&P 500, suggests that Coinbase’s long-term prospects are highly undervalued amid the current focus on trading volumes and regulatory developments. Despite sales pressures from Mt. Gox and Germany, these represent only a small fraction of daily volume, potentially creating an attractive entry point for COIN.
Adjustments in Estimates Reflect Market Dynamics
The second quarter saw stable Bitcoin prices, but ETF outflows in late June exerted some pressure on Coinbase (COIN). As a result, revenue, adjusted EBITDA, and EPS estimates for the second quarter were revised downwards to $1.34 billion, $552 million, and $0.84, respectively, from previous estimates of $1.47 billion, $613 million, and $1.01. Nevertheless, these estimates remain higher than consensus expectations.
Trading Volume and USDC: Trading volume for the second quarter of 2024 is estimated to have decreased by 31% quarter-over-quarter but increased by 129% year-over-year to $211 billion. The average market capitalization of USD Coin (USDC) increased from $28 billion in the first quarter to $32 billion in the second quarter. Looking ahead, selling pressure from Mt. Gox and Germany could present an attractive entry point, turning short-term bad news into long-term good news.
Legal Opinion: The Supreme Court’s potential overturning of the Chevron doctrine is seen as neutral to positive for the industry, as agencies would lose favorable deference only when the law is ambiguous. More significantly, U.S. District Judge Amy Berman Jackson dismissed the SEC’s claim that secondary sales of Binance Coin (BNB) tokens constitute securities transactions. These legal developments bode well for Coinbase.
Regulatory Clarity: Regulatory clarity has been on the rise. Notably, 60 senators voted to overturn the SEC’s controversial Staff Accounting Bulletin 121, following the House’s earlier decision. Additionally, the passage of the Financial Innovation and Technology for the 21st Century Act (FIT21) in the House, with substantial support from Democrats, marks another milestone. The 2024 GOP platform indicates a commitment to championing crypto innovation and ending the crackdown, further supporting the industry.
Base: A Platform with Significant Potential
Coinbase’s platform, Base, garnered significant attention in March, generating an average revenue of $5 million. However, hype subsided in the second quarter, with average quarterly revenue dropping to $1.8 million. Despite this decline, Base generated $20 million in revenue for Coinbase in the second quarter, down from $32 million in the first quarter. Total weekly active users for Base grew from 1.5 million at the end of the first quarter to 2.7 million at the end of the second quarter, indicating continuous adoption for this layer-2 network.
Strategic Positioning and Market Share
Coinbase remains an enabler of crypto innovation, addressing pain points in the existing financial system. It stands as one of the few remaining credible exchanges in the space. Our positive outlook on COIN shares is based on several factors: blockchain adoption, a deep liquidity pool and strong network effect, a trusted and compliant platform, a platform for product innovation, increasing regulatory clarity, and a strong balance sheet. As a leader in the cryptoeconomy, Coinbase is well-positioned to benefit from the mass adoption of digital assets.
We apply a 33x enterprise value to EBITDA multiple to our 2025 adjusted EBITDA estimate of approximately $2.2 billion, arriving at a price target of $282. Coinbase has emerged as a credible player in the industry post-crypto winter, gaining substantial market share in U.S. spot trading and expanding into areas such as stablecoins, derivatives, and international markets.
Stablecoin Revenue and Interest Income
Short-term Treasury yields remained stable in the second quarter of 2024, with average 30-day and 90-day yields largely flat at 5.48% and 5.47%, respectively. Following the June Federal Open Market Committee meeting, a short-term rate decline of only 25 basis points is expected in the second half of 2024, versus the market’s expectation of 75 basis points. This could provide less of a headwind to stablecoin revenue and interest income for Coinbase. Subscription and services revenue for the second quarter is estimated to have increased by 10% quarter-over-quarter to $564 million, within the mid-point range of $525-600 million. Similar revenue levels are expected for the third quarter.
Expense Guidance
Coinbase anticipates incurring expenses of $660-710 million in technology and development, and general and administrative costs, including $210 million in stock-based compensation for the second quarter of 2024. Sales and marketing expenses are projected to be $150-180 million, driven by higher USDC customer rewards, with $17 million allocated to stock-based compensation. Transaction expenses are expected to be in the mid-teens as a percentage of net revenue. Slightly higher expense guidance is anticipated for the third quarter due to investments in customer service and capacity.
In summary, despite current market pressures and regulatory uncertainties, Coinbase remains strategically positioned for long-term growth. Increased regulatory clarity, continuous blockchain adoption, and strategic expansions position COIN as a leader in the evolving cryptoeconomy, ready to capitalize on the mass adoption of digital assets.
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