Summary Coinbase shares rallied after Trump's near-assassination and selection of pro-Bitcoin JD Vance as running mate, hinting at a pro-crypto administration. Q1 results showed revenue growth driven by transaction fees and institutional business, but concerns remain about debt and stock-based compensation. Uncertainty around the future regulatory environment and organic growth of the crypto industry suggests maintaining a Hold rating on Coinbase shares at around $240 per share. Coinbase Global, Inc. ( COIN ) shares experienced a rally this week, following the near-assassination of Donald Trump but also his choice of Ohio Senator JD Vance as his running mate. COIN 1M Price History (Seeking Alpha) Vance is known to be a proponent and owner of Bitcoin USD ( BTC-USD ), the first known member of the Senate to have a stake in it, and thus the first running mate on a Presidential ticket as well. Following the windfall of goodwill around Trump's survival of the assassination, this makes pro-crypto administration seem more likely, which would benefit a company like Coinbase. Yet, I believe most of Coinbase's story is independent of what happens in the election. Moreover, we'll need actual results with a concrete program before we can make bold assumptions about the future of this company. Consequently, I am going to reaffirm my Hold rating from last time. Previous Thesis In my initial coverage of COIN, I considered the shares to be likely fairly valued, based on a Discounted Cash Flow model. Author's previous calculation One may note that a decent amount of growth is implied in this valuation. The price actually did drop briefly to about $200, but with this rally, it's closer to the valuation I gave last time. Coinbase's own thesis is that it will go beyond being a crypto exchange from which it garners transaction fees; its Stablecoin product will change global finance as it challenges big transactors like Visa Inc. ( V ) and Mastercard Incorporated ( MA ). While I generally agree that they are positioned to assume such a role, how quickly and successfully it will materialize is less certain, as it will depend on natural developments in crypto that are outside of Coinbase's control. Even if we trust the growth thesis, long-term investors would probably deserve a margin of safety, hence why I steered clear from a Buy. Additionally, I expressed concerns about the debt on the balance sheet and the high level of stock-based compensation. Q1 Results Q1 2024 results have since come out , and so far they are positive. Revenues showed aggressive growth compared to prior quarters. Q1 2024 Company Presentation While Stablecoin is where the company sees its long-term potential, this revenue growth was driven by something else. Revenue Breakdown (Q1 2024 Form 10Q) The biggest cause for the gain, especially compared to prior-year quarters, was transaction revenue, more activity occurring on the platform. CEO Brian Armstrong noted in Q1 earnings : Our institutional business continued to see meaningful growth, in part driven by the excitement around Bitcoin ETFs, which drove new customer adoption across our product suite. Coinbase Prime reached all-time highs in trading volume and active clients and nearly 40% of our clients engaged with three or more products in Q1 . Turning to derivatives. Both Coinbase Financial Markets and Coinbase International Exchange have shown promising growth in their early stages. In Q1, Coinbase International Exchange added 15 new perpetual future listings. We've also increased the position limits across both products. The spike in activity appeared to track the rally in BTC in the lead-up the latest halving this April. BTC 6M Price History (Seeking Alpha) Transaction fees for Coinbase have often come and gone, as was mentioned in my previous article. We should watch closely to see if those revenues persist in both Q2 and the following quarters. Otherwise, I believe the main areas to watch for growth are their other revenue sources, namely Stablecoin and blockchain rewards. Q1 2024 Form 10Q Since the end of Q4 2023, long-term debt also rose by over $1 billion. This came from the issuance of 2030 Convertible notes that quarter, the purpose of which was to repay debt with any sooner maturities. As their cash balance has also increased accordingly, it seems likely that they will sit on an elevated cash position, earning some net interest income, while they wait for an opportunity. As such, I don't expect the $4B debt obligation or fully diluted figures to remain at these levels for the long term. Cash Flow Statement (Q1 2024 Form 10Q) Stock-based compensation also says year-over-year growth, at a value of more than half of operating cash flows. This is also another trend that we will want to observe carefully for increases. Trump's Running Mate: JD Vance Since Trump's selection of Vance was associated with a modest rally, it is worth thinking about the impact of this on the legal and regulatory environment for crypto and Coinbase. I'll quote Armstrong again from Q1 earnings: In Q1, the court ruled on our motion to dismiss the SEC's claim regarding the Coinbase wallet, which was a significant win for self-custodial wallets across the industry. This win provided clarity for us and developers to continue to drive our onchain product growth, which we believe is an important element to fulfilling our mission of increasing economic freedom. Coinbase wallet is an important part of their operations, so this is an area of concern for sure. While they don't need a friendly administration to win in the courts (and they had a partial win already), the SEC is part of the executive branch and can pull back if guided to do so from above. Whether Trump himself will adopt a friendlier stance to crypto after being elected is one thing. As Politico reported back in May , he's publicly adopted a more favorable stance compared to his first term, but I feel Trump also tends to take vague stances depending on the audience he's trying to win. Vance perhaps represents something less ephemeral. Yet, that doesn't mean it produces overnight results upon a Trump victory. Becoming Vice President would mean Vance is no longer a Senator. While the VP is technically a member of the Senate (as its President), this is not a lawmaking role. The Vice President only presides over the sessions, and often this role is delegated to the President Pro Tempore. The hope here is that Vance will positively influence Trump to make favorable executive decisions through bodies such as the SEC. Until that happens and until a clear policy exists, I don't see now as the time to start driving COIN to a premium. Even if policy becomes more favorable, crypto as an industry still needs to grow and mature organically. The decentralized nature of the asset class means that government policy can help on the margins, but ultimately cannot drive it. More people need to begin to adopt it at greater scales. This requires a cultural change, more than a political one. Going Forward With Q2 results set to be released at the beginning of August, we will want to observe if Q1's transaction revenues remained high or if those were just cyclical business opportunities that tracked the BTC halving. Similarly, we'll want to see if debt is paid down and if stock-based compensation increases or moderates. Since my previous valuation took into account cyclical spikes by using an average of free cash flow, I don't yet see a reason to update my valuation until it's clear that this revenue spike has more secular, long-term momentum behind it. Not enough changed for me to think that my previous valuation of around $240 per share (again, for a 10% discount rate) needs revision, but future insights by management toward these changes being sticky would cause me to reconsider. Conclusion It's been an interesting week, as Trump was nearly assassinated. This alone brings to mind the impact of regulations on investments, some industries more than others, like crypto. Naming a pro-crypto running mate in JD Vance raised the price in recent days, but Trump himself is the one who would be calling executive shots, and he isn't guaranteed to win. Coinbase, meanwhile, still shows signs of cyclicality and, Q1's results didn't reflect growth in the operations that contribute more to the long-term picture. Rather, they recall moments of bullishness seen in periods such as 2021. Crypto remains something of an outsider asset class, and I believe it will continue to show this cyclicality until it becomes more mainstream. This requires us to ask for a proper margin of safety, and around $240 per share, I don't think COIN offers that. Until future quarters and the conclusion to the election decisively indicate a rise of free cash flow is on the way, I maintain my previous valuation and the Hold rating.
