I think everyone here is familiar with Coinbase. Hot stock, correlated with crypto prices. I made the mistake of not looking deeper into the business early 2023.
Now I'm going deeper into the business model. Three catalysts in the past few weeks caught my attention. Each brings their risk/reward scenario. Before diving in, I'll say that the stock price is very rich at $220 ($54b market cap, ~$3b revenue). So I'm trying to assess the downsides of building a position here for the long run.
- Stripe is partnering with Coinbase since crypto transaction costs are dropping. I view this as bullish since Stripe is developer friendly and has massive global reach.
- The U.S. Marshals Service is using Coinbase Prime for custody of digital assets. This is cool and bullish, given what the Marshals do. But also conflicting in some ways with viewpoints of Gensler and the SEC.
- Coinbase is filing lawsuits against the SEC and Gensler*. Yet simultaneously asking for regulatory clarity. I understand their position and need for this…but this is the biggest downside risk for me right now.
When this business is profitable, it's very profitable. 50-60% net profit margins. But those quickly disappear when the crypto market dries up. However, in terms of scale, Coinbase has revenue comparable to the ICE (NYSE) and Nasdaq. Both which are very healthy and very profitable financial exchanges.
I like Coinbase and think Brian Armstrong is a great founder-CEO. But help me run through more downside scenarios. Tell me what risks I'm missing. What will bring the stock down by 60-80%?
*Coinbase is now asking the SEC for access to Gensler's private emails. This a grey area. Some will view this as a personal attack which will become a vendetta. Making it even harder to measure the downside.
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