Coinbase global (NASDAQ: CURRENCY), the cryptocurrency exchange, has had a bumpy ride over the past 12 months. Once worth more than $80 billion in market capitalization, the fintech has lost more than 80% of its value.
To make matters worse, the company announced its first quarter 2022 results on May 10, 2022, which fell short of Wall Street expectations. And despite its recent woes, there are good reasons to expect further challenges for the stock trader.
Coinbase’s Latest Result Is Ugly
Coinbase has been a beneficiary of the pandemic. As global economies shut down, people who had few options for spending their discretionary money ended up buying digital assets through the Coinbase platform.
As customers had to pay Coinbase a fee for each crypto transaction, the fintech has generated monstrous growth over the past two years – revenues have grown from less than $200 million in Q1 2020 to $2.5 billion. in the fourth quarter of 2021. Similarly, net income increased more than 26 times, from $32 million to $840 million.
But as Coinbase benefited from an increase in trading activity, it was also penalized when trading volume dropped. And that’s what happened in the first quarter of 2022. A combination of lower crypto prices and lower volatility tipped its performance the other way. As a result, net revenue fell 27% year-over-year to $1.2 billion, and net profit fell from $771 million to -$430 million. While revenue fell 27%, operating expenses more than doubled in the quarter, resulting in a net loss.
Coinbase’s near-term outlook remains bleak
The first quarter of 2022 may look ugly, but the second quarter could be horrible. According to Coinbase’s April metrics, crypto market capitalization is down 18% from the end of March, while asset volatility is down 14% from the Q1 2022 average.
In short, the tech company expects lower transaction volume (and revenue) in the second quarter (compared to the first). For the full year 2022, it aims to manage adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of -$500 million. For perspective, EBITDA was $527 million and $4.1 billion in 2020 and 2021, respectively.
In other words, the weak performance in the first quarter will likely carry over to the rest of the year. And with the current turbulent external environment – thanks to falling stock markets, inflation, the ongoing war in Ukraine and other factors – it is difficult for investors to be optimistic about the outlook for the company.
On a slightly positive note, the tech company isn’t sitting still hoping for a turnaround in the external environment. It invests heavily internally to ensure that it can benefit from any reversal in the crypto price cycle. For example, it hired 1,200 employees, added gimbal to its staking offer and launched the Coinbase NFT marketplace.
In short, Coinbase is positioning itself to emerge stronger in the long term despite these near-term challenges.
A silver lining for Coinbase
Crypto tech started as a white paper, but has recently reached the mainstream through the widespread adoption of cryptocurrencies – Bitcoin and Ethereum — and other technologies like tokenization and DeFi. As more talent and resources flow into this industry, the sky seems to be the limit.
While the long term remains promising, the short term could be bumpy, as evidenced by the latest results from Coinbase. Fortunately, the young company has a strong balance sheet to weather short-term volatility. It has $6.1 billion in cash and cash equivalents, giving it plenty of resources to invest in product development and the latest infrastructure to maintain its lead in this industry.
Using the guided cash burn rate of $500 million for 2022, it would take Coinbase over 10 years to deplete its cash. To me, that’s a pretty good margin of safety. Nonetheless, investors should keep a close eye on the burn rate. Any substantial increase would be a red flag.
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Lawrence Nga has no position in any of the securities mentioned. The Motley Fool holds positions and endorses Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.