Recently, Coinbase (NASDAQ: COIN) became the first cryptocurrency exchange to trade on the NASDAQ. Coinbase stock touched a record high of $429.54 on its first day of listing and has since fallen 44% to trade at its current price of $241. So, is it a good time to buy the dip or should you wait for a further correction in its stock price?
Earlier this week, investment bank Goldman Sachs (NYSE: GS) initiated coverage on Coinbase with a “buy” rating. Goldman Sachs has a 12-month average target price of $306 on Coinbase stock which is almost 30% higher than its current trading price. The investment bank believes Coinbase is the best way to gain exposure to the highly disruptive but rapidly expanding cryptocurrency ecosystem.
According to a report from Fortune.com, Goldman Sachs explained, “If meaningful parts of the economy can transition to blockchain and crypto-native technology over time," the analysts wrote, "we see significant opportunity for [Coinbase] to benefit from its status as a critical element of the financial infrastructure for the ecosystem."
Coinbase thrives on volatility
Similar to most other cryptocurrency exchanges, even Coinbase generates a majority of its sales from trading fees and commissions. The widespread adoption of Bitcoin and other digital assets should increase the number of crypto investors going forward which in turn will drive organic growth for Coinbase. However, the underlying volatility that is associated with the cryptocurrency space is also a key driver of top-line growth for Coinbase.
Given that Coinbase derives 96% of sales from trading activities it has enough room to diversify its revenue base. The company can expand its suite of products and solutions and rollout ancillary services such as collateralized lending.
Goldman Sachs stated, “While we believe the core business today offers an attractive growth profile with the potential to drive high levels of profitability, we see significant white space for new initiatives to drive more stable and recurring revenue streams."
What next for investors?
Coinbase is an industry leader with over 56 million verified users and $335 billion in average trading quarterly volume. In Q1, Coinbase reported net revenue of $1.59 billion and total revenue of $1.8 billion. The company’s net revenue rose 8x times year over year. Comparatively, its net income soared 23x to $771 million and EBITDA rose 19x to $1.11 billion in Q1 of 2021.
Coinbase continues to benefit from the surge in institutional investment in the crypto space. In Q1, $215 billion of total trading volume for Coinbase was associated with institutional investors.
In the March quarter, Coinbase focused on improving the reliability and scalability of products to meet the growing volume on its platform. It added seven new assets to trade and 13 new assets were available to custody in Q1. Earlier this year, the company launched Coinbase Asset Hub which is a platform to help asset issuers integrate tokens with the exchange to facilitate accelerated listing.
Coinbase stock is currently valued at a market cap of $63 billion which means it's trading at a forward price to sales multiple of 10x given analysts forecast sales to touch $6.26 billion in 2021. Its price to earnings multiple stands at 32x which is extremely attractive if you are bullish on the cryptocurrency segment.
The final takeaway
Coinbase is a company that has grown at an exponential rate in the last year. However, its massive growth can be attributed to the outsized gains of Bitcoin and Ethereum. In case markets turn bearish, revenue and profit margins for Coinbase will also decline at an alarming rate.
The stock price of Coinbase will be tied to the success of the cryptocurrency ecosystem and related prices.
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