Summary Coinbase Global delivered a strong Q3 with 59% YoY net revenue growth and robust adjusted EBITDA, despite recent stock weakness. Coinbase's transaction revenue and monetization were excellent, though Bitcoin price volatility continues to weigh on near-term sentiment and the Q4 outlook. Subscription and Services revenue grew 34%, with stablecoin momentum solid, but Q4 guidance suggests some deceleration and mixed expense management. The recent valuation pullback is seen as a buying opportunity, and I reiterate my buy rating on Coinbase, confident in its long-term positioning. During the middle of the year, I reiterated my buy rating for Coinbase Global, Inc. (NASDAQ: COIN ). Despite continuing to rally for some time after my update, fortunes for the stock have reversed. Recently, the stock has experienced significant weakness, but that really isn't too surprising with Bitcoin ( BTC-USD ) prices under major pressure. The company reported earnings at the end of October, and today, we'll be conducting an analysis to see whether current levels represent a buying opportunity. In the discussion below, it is shown that Q3 was a strong quarter. While crypto prices may weigh on Q4 transaction revenues, with strong internals and robust monetization, I expect this business to rebound quickly as headwinds dissipate. For their subscription and services business, Q3 was also strong as stablecoin momentum is solid. Despite Q4 guidance hinting at a slowdown in growth for this segment, long-term government policy should provide continued tailwinds. Therefore, I view the recent valuation contraction as a buying opportunity and thus reiterate my buy rating on the stock. Seeking Alpha Financial Overview Coinbase Q3 Shareholder Letter Revenues Before diving deeper into their segment results, let's take a broad view of their Q3 earnings results. For the quarter, Coinbase reported net revenues of $1.793 billion, and you can calculate from the above figures that the YoY growth rate is a very respectable 58.81%. In the previous quarter, growth was reported to be just 2.90% for net revenues, and so it is quite obvious that their business saw great activity in the quarter. In GAAP terms, total revenue was $1.8687 billion, and that includes corporate interest and other income. This was able to beat analyst expectations by $60.37 million to show a good degree of outperformance. You can also see above that their Subscription and Services revenue surpassed their own guidance. As a whole, prior to the November crypto selloff, Coinbase's business was booming, and therefore, the recent weakness in the stock is likely driven by exogenous factors. With the company so strong before the crypto weakness, they should be well positioned to bounce back from any Q4 weakness when the crypto market stabilizes and rebounds. Expense Management In terms of key operating expenses, you can also see above that they were well within their previously provided ranges. Transaction expenses as a percentage of revenues were 14%, and that represents an improvement from Q2's 17% and from the prior year period's 15%, demonstrating solid efficiency. For Sales and Marketing, expenses increased 57.95%, and for General and Administrative, there was an increase of just 26.63%. Both of these increases were less than the net revenue growth rate, and so as a whole, corporate efficiency was also robust. As for Technology and Development, they spent just 14.10% more than they did in the year ago quarter. While that's quite beneficial for near-term profitability, this may indicate they are underspending for long-term growth. Profits Rocket Coinbase's net income and EPS are quite erratic at times, and so a likely better measure of their core profitability is adjusted EBITDA. As shown above, they reported $801 million in Q3, and that represents a 78.40% increase YoY. With topline growth being strong and expense management being overall impressive, this shouldn't be a major surprise. Back in the previous quarter, adjusted EBITDA actually declined by 14.09%, and so Q3 was a very promising quarter on many measures. Now, let's take a look at their two core segments. Segment Results Transaction Revenue Coinbase Q3 Shareholder Letter Transactions are still the company's largest source of revenue currently, and so it is understandable why investors are spooked by the crypto selloff. Total trading volumes were up 59.46% YoY but revenues for the segment increased by a whopping 82.76%, and so it seems that their monetization of the volume boom was excellent. As shown above, Bitcoin is still dominant in both volume and revenues and so with this cryptocurrency making headlines for continued weakness, again investors are unsurprisingly unnerved. That said, this strong monetization shows that the internals of the business are robust and positions them well for the long run when the crypto market recovers. Subscription and Services Revenue Coinbase Q3 Shareholder Letter Coinbase's Subscription and Services segment is a core part of the business, with stablecoins gaining much momentum. Overall, revenues were up 34.27% to $746.7 million, and while this growth rate trails Transactions' revenue increase, it still indicates solid activity. Firstly, the company stated that they "believe Coinbase continues to be the best place to use stablecoins." As you can see above, they earn a lot more revenue per unit of market cap for USDC in Coinbase products than they do for off-platform USDC. Therefore, it would make great sense for them to create a great environment to attract users and retain them on their platform. At the end of the year-ago quarter , they had a total of $36 billion in USDC market cap, with $8.1 billion being on-platform. Therefore, total market cap has grown by 88.89%, while on-platform balance has grown by 85.19%. This could be slightly disappointing, as it shows growth in off-platform USDC is outperforming, which in turn indicates that the company can likely still do better in making Coinbase an attractive platform to use stablecoins. Guidance A Bit Shaky Coinbase Q3 Shareholder Letter The company provided guidance for Q4 for select metrics. Note how they exclude the outlook for transaction revenue, as there is volatility in the results due to crypto price fluctuations. For their Subscription and Services revenues, the midpoint of the above range implies a growth rate of 17% YoY. That would be quite a deceleration from the Q3 figure that we just discussed, and so perhaps the momentum of stablecoins is expected to plateau somewhat. For transaction expenses, they expect it to remain in the mid-teens as a percentage of net revenues, and so there won't be any major changes from Q3. As for technology & development + general & administrative expenses, they are projecting a 30% increase. While an increase in development spending isn't a bad thing at all, this quite outsized increase may be from G&A, and if that's the case, profitability is implied to be under a bit of pressure, especially if transaction revenues come in soft. For sales and marketing expenses, the midpoint of the above range represents a 17% increase, far less than in Q3, and so expense management is likely to be mixed as a whole in the near term. Overall, guidance is a bit shaky, and while an outlook for transactions isn't given, it can be inferred that there will be weakness given what we saw in crypto markets in November. Valuation Pullback Is An Opportunity Data by YCharts Coinbase's forward P/E ratio has seen quite a steep contraction recently, and that could be a buying opportunity even if the company faces some headwinds and challenges. Firstly, the elephant in the room is the crypto selloff. It was stated earlier that the company still relies a lot on transactions and on Bitcoin in particular. Crypto prices obviously have a direct impact on their revenues, but I would say there is too much correlation between Coinbase stock and these prices. The internals of their business remain unchanged, and monetization of trade volumes was shown to be strong. Once crypto rebounds, the business will follow in a strong manner, and so I would say investors in Coinbase are overly reactive to volatility in crypto prices. Secondly, while guidance above suggests some plateauing of stablecoin momentum, I would say the long term remains bright for this space given trends in Government policy. Therefore, I view the recent valuation contraction in Coinbase as a buying opportunity. Final Thoughts Q3 was a strong quarter for Coinbase and while a sudden souring of the environment may cause weaker than desired Q4 results, the company clearly remains well positioned for the future of crypto and the future of stablecoins. Good monetization and platform attractiveness are internal strengths that crypto price headwinds can't really shake, and so I view the recent selloff in the stock as a prime opportunity to pick up this leader. As a result, I'm reiterating my buy rating on the stock.
