During its brief history as a publicly traded company, the cryptocurrency exchange Coinbase Global (NASDAQ: currency) Expectations were exceeded by an incredible margin. For example, analysts believed that the company would report earnings of $2.33 per share in the second quarter of 2021. Coinbase posted a profit of $6.42, beating expectations by 176%.
But according to TipRanks, analysts are very divided on the Coinbase stock, which is trading at around $260 per share as of this writing. Price targets as high as $500 and as low as $220. Apparently Wall Street doesn’t know what to do with this company.
Sometimes confusion like this presents an opportunity for those who can see what’s going on. It’s unclear if this applies to Coinbase stock, but there seems to be an underappreciated upside here.
core business development
Coinbase has two primary groups of clients: institutional investors like hedge funds and retail investors like you and me. The company generated 88% of its total revenue in the second quarter by charging transaction fees. But even though institutional investors hold much more assets on the platform and trade more often, 95% of this transaction revenue came from retail investors.
Coinbase needs to monetize institutional investors better, but for now, let’s accept the business model for what it is. Based on the numbers we’ve seen, the retail investor user base must grow to grow their core business, and they have two ways to do that.
First, Coinbase can increase the list of cryptocurrencies it supports. For those unaware, there is in thousands For cryptocurrencies, each requires a special supporting infrastructure. You can’t throw them on the platform.
It added to the company’s credit 22 new crypto assets in the second quarter alone, a record quarterly figure. This is probably part of the reason why it is experiencing strong user growth. It had 8.8 million users transacting per month in the second quarter, compared to just 1.5 million in the same quarter last year.
Second, Coinbase can be launched internationally. The company is now working on entering Germany and Japan. It is a challenge, because every country has its own regulations regarding cryptocurrencies. However, with such a small user base, Coinbase has a shot at exponential growth by expanding its network abroad.
Many investors treat Coinbase shares with extreme caution. Historically, cryptocurrency has been volatile, which motivates people to trade more often. Remember: the company makes disproportionate profits from recurring transactions. Therefore, if trading declines as the cryptocurrency becomes more stable, its business model could collapse.
However, keep two things in mind. First, potential Coinbase investors are compensated for this risk with cheap value stocks. The company is very profitable and only trades 22 times appendix The earnings, according to data from YCharts, are an almost unheard of valuation for a fintech stock.
Second, Coinbase is getting their money back in business. According to management, the capital allocation strategy has 70% of the capital invested to improve the core business, 20% is used for strategic investments, and 10% is spent on innovation with new products. Seasoned investors will recognize this last component as the desirable trait called facultative.
Here are two examples of Coinbase optionals. First, the company supports the popular cryptocurrency Bitcoin. But it now has a feature called Bitcoin Borrow, which allows users to borrow money using Bitcoin as collateral. It also recently launched the Coinbase Card from Visa So that users can spend their cryptocurrency on daily purchases.
A more compelling example of this optional is Coinbase Cloud. Cryptocurrencies live on the blockchain, but it is not the only thing that can be built on the underlying blockchain technology. Many decentralized applications can also be built on the blockchain, and Coinbase wants their cloud product to become the The realistic way it was built. Management envisions Coinbase Cloud becoming like Amazon Web services but for encryption. This could be a huge opportunity if cryptocurrency becomes a larger and more permanent movement.
In short, Coinbase stock is a risky investment, as its primary source of income is questionable. However, the company cannot be completely excluded, since its current growth gives it the optionalness that its large financial resources provide. Its non-transaction-based revenue has increased more than 15 times in the past 12 months alone, so it’s clear that Coinbase is mitigating risks to its core business by developing other revenue streams.
The cryptocurrency space is still small, so it’s hard to predict what it will look like in five to ten years. However, if you think the cryptocurrency is still in its infancy, then Coinbase stock looks like it might be worth adding to a diversified portfolio.
However, I won’t be making a big bet on Coinbase stock today. The risk of declining cryptocurrency trading volumes remains. But if this company implements its vision, even allocating a small portfolio can boost your overall returns in the coming years.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.