It’s hard to see why investors would bet against Coinbase (NASDAQ:COIN) stock at this point. The company is experiencing tremendous growth and is executing a strategy that will enable it to continue to do so.
One of the bigger criticisms of Coinbase is the idea that cryptocurrencies will experience some sort of death or slow decline. If you believe that cryptocurrency is here to stay, as I do, I would ignore those worries and consider buying COIN stock.
Because at its heart, Coinbase is a phenomenal success story that’s on a smart path.
Coinbase has grown phenomenally across a variety of metrics. Overall, its growth outlook is positive, but it’s facing some obvious, emerging issues. I’ll start by diving into the good news. Then I’ll highlight Coinbase’s challenges and the company’s approach to dealing with them.
The growth of Coinbase’s revenue over the past year-and-a-half has been quite astounding. Its top-line increases reflect the tremendously increased purchases of cryptocurrency in the last year and, as a result, could be skewed. But even in the last three quarters, its sales growth has been rapid.
Coinbase’s revenues came in at $497 million in the fourth quarter of 2020, $1.6 billion in Q1 of 2021 and $2,03 billion last quarter.
Its net income jumped 335% in Q1 versus the previous quarter and 108% in Q2 compared with Q1.
Investors should be excited to know that Coinbase’s Q2 net income came in at $1.6 billion, representing roughly 80% of the $2.03 billion of sales that it recorded. It is a service company, so its margins are expected to be high. But nonetheless, since it’s a young firm, it deserves credit for its high margins.
I could go on and on citing positive metrics about Coinbase. But it’s just as important to note that it does have some meaningful challenges.
One of the biggest issues facing Coinbase is the decreasing ratio of assets held on its platform to its trading volume.
Coinbase wants its users to hold their assets on its platform so that it can derive more fees from them. The company would like to service a large amount of assets, rather than acting simply as a crypto trading platform.
In Q3 of 2020, Coinbase held $90 billion of assets on its platform while recording $89 billion of trading volume.
But in the last two quarters, a pattern has emerged: Users continue to utilize Coinbase for trading more and more, but store their assets on the platform less and less. That is an issue because Coinbase wants to derive a greater percentage of its revenues from its subscriptions and services.
In fact, assets on the platform actually decreased from Q1 to Q2, dropping from $223 billion to $180 billion. That still represents 11.2% of the total market capitalization of all crypto assets, but the decline is an issue.
The company is keenly aware of what’s at stake. Another key issue Coinbase seeks to address is that of subscriptions and services. Again, the company wants to diversify its offerings and revenue base.
Subscription and Services
In Q2, Coinbase derived 94.7% of its revenues from trading fees. A mere 5.3% of its revenues came from subscriptions and services. The company is seeking to increase the latter figure.
To its credit, it has made progress. A quarter earlier, only 3.7% of its revenues came from subscription and services fees.
The company is also diversifying internationally, as it has entered Japan and Germany. All of this progress suggests that COIN stock is a worthwhile investment.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.