Coinbase reported Q2 earnings yesterday at market close. As we do every quarter, below we will discuss the good, the bad, and the ugly… Before we get to that though, let’s just lay out some key numbers:
- Monthly Transacting Users (MTUs) were 9 million (down 2% from Q1)
- Total trading volume was $217 billion and transaction revenue was $655 million (down 30% and 35%, respectively)
- Subscription and services revenues were $147 million (up 44% YoY)
- Net revenue was $803 million
- Adjusted EBITDA loss was $151 million
- Net loss was $1.1 billion ($647 million if you exclude non-cash impairments)
- Cash on balance sheet is $6.2 billion
Investors and readers should also note that this was a quarter of not only brutal price decreases across crypto, but also multiple blowups and bankruptcies as we have meticulously covered in this newsletter.
With all that out of the way, now let’s get to it. Caveat emptor.
The Looming SEC investigation. Although we covered this extensively in CoinSnacks, we didn’t get much more clarity in the earnings call. This was to be expected as it’s a relatively new headwind and there probably isn’t much the company can say. With that being said, we still want to highlight this as a major potential problem for Coinbase.
Unlike some of the company’s main competitors, Coinbase is a US exchange and, therefore, must exist within US regulations. Having to take punches from the SEC early on likely means that the company will be the first to get through any issues and potentially have an actual advantage over other exchanges when it comes to operating in the US.
Coinbase lost a lot of money. There’s no other real way to put it other than… ouch. In Q2, Coinbase’s net loss was $1.1 billion. Now, we don’t want to excuse the huge loss, but there is a detail that readers should be aware of. The company actually only lost $647 million. That’s still a huge number, but much less than the headlines you will see in the media. This is due to two main factors.
(1) The company had to take non-cash impairment charges due to investments it has previously made in cryptoassets. As we have covered in the past, Coinbase has committed to making quarterly cryptoasset investments. And although we can assume Coinbase didn’t sell a single token, due to accounting changes that are now required by public companies, they had to report paper losses in their earnings. It’s a weird rule but it’s the reason Buffett’s Berkshire Hathaway, for example, also reported net earnings of -$43.8 billion even though the company didn’t sell a share of stock.
(2) Secondly, Coinbase marked down some of its private investments. Similar to the above point, although Coinbase has never marked up their ventures portfolio, they marked it down by $69 million this quarter.
Still retail and US centric. As we have covered over and over ad naseum, Coinbase is a retail heavy exchange. This means that as they fight against other exchanges, they will have to begin lowering the fees they charge retail customers. This eats into their revenues as a result.
With that being said though, the failures at other exchanges and products such as Celsius and Voyager might just actually be a boon for Coinbase as retail users begin to flock towards what they trust. We’ll see.
Expenses are very high but are coming down. Between operating expenses and stock based compensation, the company is blowing through a ton of cash.
In Q2 the company also laid off 18% of its workforce, which we won’t see hit the financials until Q3. Furthermore, Coinbase executives in the earnings call claimed that:
“If we have the same size of employee base in 2023, our stock-based comp would come down on a year-over-year basis as we do have some M&A earn outs and other multiyear grants from prior years that are being amortized in this year from a multiyear best schedule.””
We here at CoinSnacks still believe that 3% dilution due to stock-based-comp is too high.
The company has a boatload of cash on its balance sheet. We seem to hammer this point home ever quarter because it’s so important. Coinbase has more than $6 billion in cash or cash equivalents on the balance sheet. That means, at current prices, Coinbase is trading for ~3x cash.
That said, Coinbase is now sitting in the perfect position to spark M&A activity with struggling or strategic companies. Media outlets, such as the NYT, continue to write about how Coinbase’s competitors are beginning to grow as Coinbase “squanders.” In our opinion, this is a short-term proclamation. We believe that Coinbase will very soon begin making strategic investments and acquisitions. But don’t just take our word for it, here is Coinbase’s CFO, Emilie Choi:
“We continue to be active across both ventures and M&A. It’s an area that has helped us gain access to the innovation happening in the crypto ecosystem. It helps us strengthen our competitive positioning. It helps us execute against our mission. And crypto winters, we view as builders markets. It’s often the best time for us to be greedy when others are fearful.”
Healthy risk controls. For all the hate that Coinbase receives, the company’s risk control over the past year has been laudable. As firms such as Celsius, 3AC, Voyager, and others have had solvency concerns, bankruptcies, and client withdrawal blocks, Coinbase has been sitting clean. As stated in the earnings call:
“Risk management is a first principle… We’re holding customer assets one to one. We’re not rehypothecating. We’re not lending any assets without customer consent. What our customers choose to do with their assets is our customers’ choice. Coinbase is not making independent decisions of what to do with those assets without customer approval.”
Staking is beginning to make an impact at Coinbase. In 2020, subscription and services made up 4% of Coinbase’s net revenue. In Q2 2022, it made up 18%.
Putting it all together, Coinbase is printing money from staking, custodial fees, and interest income. And all signs point to this growing significantly from here on out. Between the recent additions of Cardano and Solana for staking, as well as the upcoming Ethereum Merge , Coinbase is set to radically increase revenue uncorrelated to the rest of the crypto market.
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