The highest-flying digital assets certainly receive a lot of attention from investors. For those who aren't ready to fully jump in, owning a business like Coinbase(NASDAQ: COIN) might be an idea worth considering.
But even this top crypto enterprise has taken investors on a volatile journey. The company's shares skyrocketed 391% in 2023 before rising 19% so far this year (as of Aug. 26). However, they trade 42% below their peak price from the bull market of 2021.
Is it time to buy the dip on this crypto growth stock?
Riding the crypto market's momentum
After the crypto winter that started in 2022, Coinbase's growth has been notable. Net revenue increased 50% in the fourth quarter of 2023 thanks to rising digital-asset market prices. The momentum has carried over into this year, although transaction fees dipped significantly between Q1 and Q2.
Coinbase is a leading brokerage and exchange that serves the cryptocurrency industry. Naturally, when there's bullish sentiment from investors and traders, it boosts activity on the platform. The result is a financial windfall for Coinbase. But the opposite is also true, as a bear market can create a powerful headwind.
The leadership team, led by founder and CEO Brian Armstrong, is fully aware of this unfavorable trait. That's why they've been trying to create a more predictable business model, one that relies less on trading volume and more on recurring revenue.
Coinbase is seeing strength in areas like stablecoins, blockchain rewards, and custodial fees. Known as subscriptions and services, this segment grew sales by 79% year over year in Q2 (ended June 30). It represented 43% of total revenue, up dramatically from a 5% share just three years ago. The main objective for Coinbase is to usher in a new era in the industry, one characterized by greater utility of crypto and blockchain, as opposed to financial speculation.
Not an easy stock to own
At their low point toward the end of 2022, shares traded at a price-to-sales (P/S) ratio of under 1.5. But after the stock's huge comeback, the valuation is less compelling. It goes for a P/S multiple of almost 11.9 today. This is very expensive, in my view, and it demonstrates the market's extreme levels of enthusiasm toward the company.
That perspective doesn't change even when you realize Coinbase more than doubled its revenue between the first six months of 2024 and the same period last year. And operating income came in at $1.1 billion compared to a $197 million loss in the first two quarters of 2024. That's an impressive turnaround, but things can turn sour in an instant if market conditions deteriorate, which they likely will, if history is any indication.
Add these wildly unpredictable financial results to Coinbase's steep valuation, and it's extremely difficult for any investor to buy and own the stock for the long haul. But I can still understand why the business would be on your radar.
There might be investors out there who want exposure to the cryptocurrency industry without having to choose and own specific digital assets, like Bitcoin or Ethereum, for example, directly. Perhaps they view this endeavor as being too risky.
Here's where Coinbase looks compelling. It provides exposure to a company, via equities, that serves the overall crypto industry. And to further clarify the connection, Coinbase's ultimate success hinges on the success of the market. If in five or 10 years, crypto and blockchain technology become a more important part of our daily lives, I'd be shocked if Coinbase doesn't benefit as well.
Investors who are bullish on the industry, and have a high-risk tolerance and a longer time horizon, are the only ones who should buy this stock.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.
