About Coinbase
Crypto is a hot topic.
Some are adamantly against it due to environmental and human rights concerns while others are intent on buying every little Bitcoin dip they can, holding strong beliefs that cryptocurrencies are not the past nor the present, but the future of money.
From our perspective, investing in cryptocurrency is more of a speculative venture to toss some money at in hopes of achieving some crazy returns in a short amount of time than a long term investment that you trust to perform steadily.
Frankly, we don’t think many of those who do “invest” in cryptocurrency know much about what they’re investing in but are more just along for the ride and have come to grips with the risk that comes with playing in a volatile crypto landscape.
That’s what I do.
I set aside a portion of my hard-earned dollars in Bitcoin, Ethereum and Dogecoin. Prior to even finalizing my purchase orders for these securities, I make sure I am in the mindset that the money I invested is already gone. There’s nothing I can do to alter the price of Dogecoin (short of emailing Elon Musk and asking him to Tweet about it) and I fully realize that it’s just a lot more risk to add to my pretty conservative overall portfolio.
Now the company I used to purchase those cryptocurrencies is apparently on the verge of bankruptcy.
Enter the United States’ largest cryptocurrency exchange platform, Coinbase.
Before we get into the company’s current situation, let’s get a better understanding of Coinbase’s fundamentals and financials.
Coinbase’s stock financials
The company currently has a market capitalization (shares outstanding multiplied by the current share price) of just south of $12 billion, a short interest of just over 4% and a price-to-earnings (P/E) ratio of 5.48.
Setting the scene, short interest or the general interest of the market in betting against Coinbase stock appears to be rising given their recently sour earnings call. However, this recent earnings call that pushed the company’s stock into new all-time low territory has enabled the P/E ratio to dribble all the way down to a very attractive 5.48 (below 20 is undervalued, 20 is fairly valued and above 20 is overvalued). From a strict investment standpoint, this current P/E ratio has me quite interested in picking up a share or two.
Moving forward to their balance sheet, the company has total assets of around $21 billion and total liabilities of about $14.9 billion. This doesn’t really scare me, especially given that Coinbase is a relatively new company (and very new to being publicly traded) in a “growthy” industry that in many ways has yet to be proven.
Nonetheless, the company’s total assets do appear to comfortably outweigh its total liabilities.
Onto Coinbase’s income statement, the company’s total revenue has been exponentially increasing from $534 million in 2019 to nearly $7.9 billion in 2021. While impressive, this is to be expected as the company expands its marketing efforts, new programs, and new available tradable currencies among all of the other ways in which they’ve expanded and will likely grow in the future.
In the last of the big three, Coinbase’s cash flow statement, the company has seemingly done a fantastic job getting net income positive in the first few years of becoming publicly traded. For instance, their net income in 2019 was negative $30 million which has since grown to $322 million in 2020 and around $3.6 billion in 2021.
Coinbase’s stock fundamentals
So far, there’s been substantial growth, the company appears to be financially sound and shares happen to be currently trading at a ginormous discount.
What is also encouraging about Coinbase’s financials is that they seem to be ahead of the profitability curve. Specifically, the company’s annual net profit margin sits at around 46% to the industry’s nearly 33%.
On top of strong profitability, when it comes to annual returns on equity, assets and investment, Coinbase can do those things pretty well too. All of their metrics stand significantly higher than the industry average.
Barring the current hoopla, I am a huge fan of Coinbase stock.
However, now that we have a better picture of how strong and financially stable and viable the company currently appears to be, what is all of the media fuss about?
Recent news with Coinbase
Word on the Street is that Coinbase missed earnings pretty badly.
This ultimately caused cryptocurrencies themselves to fall to lower levels.
Apparently, the amount of users on the company’s platform dropped by a sizable margin from 11.4 million to 9.2 million between quarters. This seems to be a phenomenon in many sectors; the streaming industry is one that comes to mind.
It should also be noted that the overall, general market and tech sector sell-off seemed to push shares of Coinbase stock down even further; this indicates a market problem, not necessarily a Coinbase problem.
But the company missed earnings and by a pretty wide margin which has led many to speculate that it may soon fold and file for bankruptcy as many have alluded to the fact that crypto isn’t FDIC insured. Theoretically, if Coinbase where to go under all users could lose all of their crypto and accounts like mine would go from being slightly risky investments to a complete loss.
Tweets tend to lead to panic and panic leads to selling and selling leads to a depressed (in both senses of the word) stock price.
The question that all of us, especially Coinbase users want to know is whether our funds are safe on their platform and ultimately, for those considering investing in Coinbase itself, if the company is planning on filing for bankruptcy.
Regarding the first question, ultimately no one’s funds are “safe” on the platform because crazy stuff can happen, theoretically pushing the price of all cryptocurrencies to $0. While objectively true, it seems to be an incredibly unlikely scenario that doesn’t deserve to0 much consideration.
Coinbase bankruptcy
However, as it relates to the current and future efficacy of Coinbase itself, it is our group’s opinion that the company will likely be fine and is likely to have some short-term turbulence, but in the next month, six months, years and decades to come it will be fine.
Nonetheless, if the bankruptcy scenario were to be played out it would likely be a Chapter 11 filing which is a lot different and less serious than a Chapter 7 filing.
Specifically, Chapter 11 is basically when a company goes through some sort of debt and capital structure restructuring process whereas Chapter 7 is when a company engages in the process of liquidation or the selling of its assets.
Restructuring tends to be fine, but liquidation is when you see one of those furniture stores having a “liquidation sale” which really means “please help us get rid of inventory because we are going out of business.”
Pictured above is founding partner and CEO of Coinbase, Brian Armstrong.
We believe the restructuring scenario (Chapter 11) is unlikely and the liquidation (Chapter 7) is next to impossible.
But never say never!
We’re comfortable being wrong; we’re just taking some stabs at how this interesting situation is going to play out.
Should you buy Coinbase stock?
Ultimately, our stance is that if Coinbase does not file for bankruptcy, they will be fine, and it would likely be a great idea to buy shares in the company while it’s trading at a steep discount. The company has strong fundamentals and doesn’t appear to be using excessive leverage (debt) and has a seemingly sound business model centered around transaction fees like other successful publicly traded entities. If there are more headwinds for Coinbase moving forward, we think, strictly according to the numbers, that if well managed, the executive team would have little to no problem getting things back on track.
Given all of this information, we currently give Coinbase a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.