Coinbase Q4 2023 Earnings
Level 2 - Value Investor
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Our main focus this week has been Coinbase COIN 0.99%↑.
Since our positive update on the stock last week, COIN has risen from $142 to a high of $190 post-earnings today, a gain of 33%. While our long term hold isn’t an earnings play, we have a short update on the report.
Q4 Earnings at a Glance
Coinbase reported its first profitable quarter in two years with earnings per share of $1.04. This brings its full year (2023) results profitable by $94.8 million.
Reminder: Coinbase lost $2.62 billion in 2022.
Return to profitability was enabled by an aggressive cost cutting strategy which achieved a 45% year-over-year reduction in total operating expenses, combined with increased trading volumes in Q4.
The financial position of the Company has improved:
reduced debt by $413 million (~12%)
USD reserves $5.7b (+$217mm YoY)
$1b of crypto assets at fair market value
Retail have returned to the market. Consumer transaction revenue was $493 million in Q4, up 79% quarter-on-quarter, generated by $29 billion in trading volume, up 164% quarter-on-quarter. This represents a gain in market share, outpacing the US spot market volume growth of 90%.
The blended average fee rate achieved in Q4 is similar to the “echo bubble” (Q1 2023) which featured similar volatility and positive crypto returns.
Institutions: Coinbase has onboarded a third of the top 100 hedge funds in the world (ranked by Assets Under Management). Institutional transaction revenue was $37 million, up 161% quarter-on-quarter. Although Q4 doesn’t include custody for the Bitcoin spot ETFs, total assets under custody at year end were $101 billion. Coinbase was named as the Primary Custodian on 8 out of 11 ETF applications. Custodial fee revenue was $20 million, up 24% quarter-on-quarter.
Financial Results
Total revenue for Q4 was $954 million, up 42% quarter-on-quarter. Net revenue was $905 million, up 45% quarter-on-quarter. The company reported a net profit of $273 million and Adjusted EBITDA of $305 million.
This translates to $1.04 in Earnings Per Share.
Sidebar: Mark-to-Market for Crypto Assets
In December 2023, the FASB issued Accounting Standards Update No. 2023-08 (“ASU 2023-08”). Effective 2024, Coinbase will measure the majority of its crypto assets at fair value and will report changes in value in net income each reporting period. Coinbase holds ~$1b in cryptoassets.
If crypto prices continue to rise, Coinbase will reflect this value in Q1 ‘24.
Potential S&P 500 Listing
When a stock is included in the S&P 500, it benefits from inflows from the major investment products which are required to purchase each company in the index. More importantly for a crypto company, inclusion in the index leads to greater investor attention and analyst coverage. We know how much attention matters in crypto!
The Index Effect: excess returns associated with a stock being added to a major index. According to research by S&P, this effect has disappeared due in liquid & efficient markets.
Decisions to list a stock in the prestigious S&P 500 index are taken by a committee at Standard & Poors according to both quantitative and qualitative eligibility criteria.
Coinbase currently meets some of the requirements to be considered for inclusion in the index (liquidity, market capitalization, exchange listing, and domicile). And we’d make the case that it will satisfy the qualitative aspects as the most significant and respected domestic crypto exchange & custodian.
The remaining barrier to inclusion is financial viability: the sum of earnings in the last 4 quarters must be positive, and the most recent quarter must be positive. If Coinbase can aggressively grow its share of the trading market, retain its quasi-monopoly as the crypto ETF custodian and the total crypto market cap / trading activity reaches record highs we think Coinbase might be included by end of 2025.
Concluding Thoughts
2023 was a good year for Coinbase. Highlights included:
executed well on major cost cuts
secured significant relationships with institutions
became dominant custodian for ETF products
expanded international offering, obtaining licences in many foreign jurisdictions and launching international futures trading
litigated against the SEC to achieve regulatory clarity for the industry
launched an Ethereum rollup BASE Chain
Looking forward, we wonder why a US resident can trade Bitcoin futures on CME but is unable to access the same product on Coinbase. Derivatives trading generates huge fees for exchanges and we think a more crypto friendly regulatory regime may permit Coinbase to offer this product to (qualified) US retail customers.
The large international exchanges (Binance, ByBit) have been shut out of the US market and Coinbase appears to be the only firm with the regulatory favor to potentially capture this market. Although Binance is a private company and does not publish its revenues, we’ve previously estimated them at up to $8 billion in a bull market and $4 billion in a bear market. Capturing significant market share from Binance would significantly increase Coinbase revenues.
Futures are under the jurisdiction of the CFTC, so the SEC v Coinbase case isn’t relevant here. However, in the “revolving door” environment which exists between finance houses and regulators, CFTC staff may take a more favorable view of retail access to crypto derivatives in the coming years. Incentives matter.
No matter what happens to the stock price in the short term (weeks to months), we think the Company has a great business and will continue to grow (year over year).
Accordingly we plan to hold our exposure through the bull market.
We’ve been bullish on Coinbase stock since it traded at $50 last May, making the bold prediction that the exchange would prevail against regulators in court and become the dominant US crypto exchange / custodian. We emphasized the stock merited being considered a “core holding”, alongside Bitcoin and Ethereum. Become a paid subscriber today to access our future technology and investment analysis.
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.
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Bought some last week and just grabbed my phone to make sure the transaction went through. How nice, seeing that big green arrow. Thanks!
Imagine the conversations of millions of boomers seeing COIN listed on their S&P indexed retirement funds and asking their financial advisors, what’s that? Oh it’s that Bitcoin company. And it’s another step towards the industry’s ascendance.
Currently kicking myself for lacking the stones to buy the calls. Had my order filled out and bailed.. feels bad