Coinbase (COIN) Races Past Analyst Estimates

Cryptocurrency exchange Coinbase Global, Inc. (COIN) continued to ride a surge of increased interest in Bitcoin (BTCUSD) and cryptocurrencies during the second quarter, reporting earnings that blew past analyst estimates yesterday. The San Francisco-based company reported $2.23 billion in earnings versus analyst estimates of $1.76 billion. It also reported a diluted earnings per share (EPS) of $6.45, when analysts had expected it to report earnings of $2.37 per share. Excluding stock-based compensation, the company’s EPS amounted to $3.45, still besting analyst estimates.

Investors were unimpressed with Coinbase’s earnings when they were released in after-hours trading yesterday, and the stock fell by as much as 2%. They seem to have warmed up to its potential this morning. As of this writing, Coinbase’s shares are trading at $287.27, up almost 7% from the day’s start. Since their debut on the stock market in April, Coinbase’s shares are down by 12.5%.

Earnings That Mirror Crypto Performance

Coinbase’s earnings are tied to the performance of volatile cryptocurrency markets. At the beginning of the second quarter, Bitcoin continued its ascension, which began at the end of last year, and set a new price record. Other cryptocurrencies also set new highs as the overall valuation of crypto markets skyrocketed on the back of renewed attention on crypto from institutional and retail investors.

As North America’s biggest cryptocurrency exchange by trading volume, Coinbase benefitted from mounting interest in the new asset class. Overall trading volumes rose by 38% to $462 billion in the second quarter, and the number of Monthly Transacting Users (MTU), a measure of user engagement with the company’s products, multiplied to 8.8 million from 6.1 million in the earlier quarter.

While it is best known as a cryptocurrency exchange for trading, Coinbase has introduced several new products in the past couple of years to keep pace with crypto’s growing momentum. Those offerings are now gaining traction with users, the company stated.  

“We are seeing people do more and more with crypto,” said Coinbase CEO Brian Armstrong during the company’s earnings call. According to the exchange, 1.7 million users used its Staking services to generate yield from their cryptocurrencies, while 2.3 million users “engaged” with its Earn platform for rewards tied to educating themselves about cryptocurrencies.

The company also touted its platform’s attractiveness to institutional investors, who account for a majority of trading volume and assets at the exchange. Ten percent of the top hedge funds by assets under management (AUM) use Coinbase’s services, chief financial officer Alesia Haas said during the earnings call. Coinbase has also formed “partnerships” with electric car maker Tesla, Inc. (TSLA), hedge fund Third Point Services LLC., and PNC Financial Services Group LLC. (PNC), among others.

A drawdown in prices toward the end of the quarter coupled with increased regulatory scrutiny, however, led to an exodus of investors from crypto markets. The total number of crypto assets at the exchange fell from $223 billion in the previous quarter to $180 billion. Out of that figure, Bitcoin accounted for 47% of all assets, while Ethereum (ETHUSD) was next with 24%. The latter cryptocurrency also surpassed Bitcoin in trading volume at the exchange due to increased interest in Decentralized Finance (DeFi).

Volatile Times Ahead?

Coinbase does not provide guidance for future earnings but stated the trading volume and MTUs on its platform in the third quarter will be lower as compared to the same period a year ago. That prognosis is in line with the performance of crypto markets, which have pulled back from their earlier highs and are currently in the crosshairs of regulators and lawmakers. Coinbase, which is a regulated exchange, urged for “smart regulations that promote innovation.” It joined a chorus of stakeholders recently in protesting a crypto tax provision that imposes financial reporting requirements in the $1 trillion infrastructure bill.         

Analysts have a mixed take on the stock. BTIG’s Mark Palmer has set a Buy rating and a price target of $500 for the stock. He cited Ethereum’s trading volume spike and the company’s focus on institutional investors, away from retail, as reasons for his optimism about its prospects. Mizuho analyst Dan Dolev wrote that an increase in August daily trading volumes from the previous month had generated “excitement in the stock in the past week.” The analyst continued, “However, since volatility can fade just as quickly as it comes, Coinbase’s fiscal-year outlook remains somewhat of a coin toss.”