Summary Coinbase shares have dropped since June due to altcoin price declines and decreased user engagement. Concerns about the potential negative impact of a Harris presidency on the crypto market appear overblown. Coinbase's Q2 results show resilience, with diversified revenue streams and commitment to positive adjusted EBITDA in all market conditions. Add to this bipartisan legislation to help make regulations easier for Coinbase, and I think shares are still a strong buy. Investment Thesis Coinbase Global, Inc. ( COIN ) shares have dropped by approximately 5% since I last wrote on them in late June as Bitcoin is roughly flat, but the prices of altcoins have suffered from sharp declines. The drop in the overall crypto market cap has impacted Coinbase's average daily volumes by 27.56% compared to the previous quarter after they reported a decline in user engagement and trading activity on the platform. In Q2, the exchange's market share slid to 41.2% from 44.6% in Q1 after heightened competition (from companies like Robinhood Markets, Inc. ( HOOD ) which I also happen to be bullish on ) and thus user migration to other platforms. The crypto market's recent bearish tilt is a function of Vice President (and candidate for president) Kamala Harris' strong showing in polls showing she has a real chance of becoming president (much higher than Biden did a month ago). Critics fear she will adopt policies that are even less favorable to the cryptocurrency sector than the Biden administration. What's notable about this is that she has been far less outspoken on the issue compared to her opponent, Donald Trump, who has been a vocal supporter of the crypto industry. I think that the concerns about Harris' potential presidency devastating to the cryptocurrency market appear overblown. In the past, the U.S. stock market has demonstrated growth across both Democratic and Republican administrations. The cryptocurrency market has done the same. And I expect that going forward, the cryptocurrency market will likely exhibit a similar trend. Under President Biden (specifically SEC Chairman Gary Gensler), the market has definitely been affected by the increasing regulatory scrutiny, but that doesn't mean it has collapsed. Similarly, I think this means that a Harris administration would not be the grenade into the crypto machine like many fear it would. The U.S. financial system (and I think the Defi market as well with most coins being decentralized) tends to find an equilibrium regardless of the political chaos, as the investors who participate in crypto are now spread across different income levels and global markets. It's really one of the most global financial markets we have. Do we really think one country's leader is going to stop all that? On top of this, I think Congress is actually moving in the opposite direction, with legislation on the docket to help safeguard crypto as a legitimate asset class. I believe these legislative developments will further help provide favorable legal frameworks to the world of crypto. In essence, I think all of this political bearishness is overblown. I'm still bullish on Coinbase. I believe they will benefit from the still strong (and YoY growing) investor confidence in crypto that will outlast short-term political concerns. Why I'm Doing Follow-Up Coverage As I mentioned before, Coinbase has dropped 5% since my last coverage update, but I think the story is the same meaning this fall is largely noise. The crypto exchange faced lower trading volumes in Q2 amid heightened competition from platforms like Robinhood. I think a lot of the crypto market's reaction has been influenced by political developments with the odds of Trump winning the presidential election now lower . The sudden shift in political expectations after President Joe Biden's decision to back out has raised a lot of concern among crypto investors. They fear that without Trump's support for less crypto regulation, Harris might likely impose stricter regulations that curb the rapid expansion of the market. With this (and the betting odds) I think a lot of this perceived risk is now overpriced in the market. Despite these concerns, I really think the long-term fundamentals remain strong. There's increasing institutional adoption through Bitcoin and Ethereum ETFs plus broader acceptance of cryptocurrencies as more legitimate investment vehicles. I'm doing follow-up coverage to show the market is too bearish and too irrational here about the political effects on crypto. When the market is irrational and when the market is too bearish, that's when I think investors have the best chance to make a strong return. Quarter Shows They're Resilient Even With Sell-Offs To understand where Coinbase is at right now, we have to look at the market's overall mood (including specifically Bitcoin). Germany and now the United States have both recently sold off (or are selling off) large amounts of Bitcoin, which has really contributed to the ongoing volatility in the cryptocurrency market. The German government liquidated approximately $175 million in Bitcoin, while the U.S. government has followed suit. In all, the two governments have sent a combined $738 million from their wallets to the exchanges in order to sell off the proceeds. I think this is a terrible idea (but that's a different discussion). As a U.S. citizen, it's really disappointing to see the government divesting from Bitcoin, especially given the long-term potential of the asset. Despite the short-term negative impact of these sell-offs, I still think that they cannot strongly alter the long-term path of Bitcoin, the path of crypto as a whole, or the tailwinds this will provide Coinbase. While these are probably an important factor in keeping Bitcoin's price range-bound this summer, they won't last forever. Coinbase's Q2 earnings reveal still strong performance with total revenue of $1.45 billion, up 104.8% YoY . However, while they recorded a modest net income of just $36 million, I think it's important the exchange continued to be profitable even in a challenging crypto market. What's also key is that the quarter's results also show Coinbase's efforts to diversify revenue streams through the growth of their subscription and services revenue, which surged 17% quarter-over-quarter to $599 million. The company used to rely mainly on transaction fees, which declined by 27% due to lower trading volumes. Compared to previous market cycles, Coinbase's revenue stability has already improved which, I think, is big here. Their emphasis on building out subscription-based revenue lines through products like blockchain rewards and custodial services has improved their income stream. The 300% quarter-over-quarter growth in transactions on Base, Coinbase's Layer 2 solution, is further proof of this. During the company's August 13 conference , CFO Alesia Haas emphasized that the company has committed to maintaining positive adjusted EBITDA in all market conditions, regardless of the volatility in the cryptocurrency market: Starting in January of 2023, with our first quarter earnings call, we made a commitment that we would generate positive adjusted EBITDA in all market conditions, and that we would not subject the market to the volatility of crypto, that we would neutralize that through our expense management and the discipline of our execution. And we've now largely delivered on that goal. We've delivered positive adjusted EBITDA for six straight quarters through various crypto asset volatility and crypto market price conditions. And that success has been due to our focus on expenses and making sure we're really prudent in managing our fixed expenses and also due to our focus on increasing revenue diversification. So in Q2, you've noticed that our subscription and services revenue reached almost $600 million of total revenue in the quarter. That was the all-time high of this total combined revenue. And that provides some insulation from crypto asset price and volatility, which drives variability in our transaction revenues. We believe both of these can grow over time, but that diversification of revenue that comes from different drivers is helping us build this all-weather company. During their Q2 earnings call , Coinbase's CEO Brian Armstrong stated that their business model has become far more stable and less reliant on the volatile nature of cryptocurrency markets than in the past. He announced: Q2 was another strong quarter, and it was our sixth consecutive quarter of a positive adjusted EBITDA. Subscription and services revenue reached an all-time high with transaction revenue declining versus Q1. Coinbase is now an all-weather company with increasingly diversified revenue streams and I'm proud of our discipline managing expenses. In closing, Q2 was another great quarter across the board. Whether the market is up or down, we're driving the industry forward, building more predictable revenue streams, and creating long-term shareholder value -Q2 Call. What I am trying to get at with these results is that Coinbase is far more stable than it used to be from an operational standpoint. This not only helps with crypto market volatility, but it also means that if any particular part of their business model comes under threat, they have a diversified business to help offset this. Company Is Well Positioned In a Harris Administration In Congress, outgoing Senator Debbie Stabenow (D-Mich.) and Representative Patrick McHenry (R-N.C.) have both expressed their strong support for advancing cryptocurrency legislation. Stabenow, who chairs the Senate Agriculture Committee, emphasized the importance of transferring more crypto regulatory authority to the Commodity Futures Trading Commission (CFTC) which has been a key point of legal contention in Washington: who controls the regulation of crypto. Meanwhile, McHenry has been actively promoting the Financial Innovation and Technology for the 21st Century Act (FIT21), which aims to improve the crypto regulatory framework. CFO Haas has mentioned this during the conference event earlier this month: I think it's so important that we acknowledge Senator Stabenow and Representative McHenry for their leadership. Both of them have exemplified leadership in support of crypto and bipartisan legislation, and we're very grateful to all of their initiatives. So as you saw FIT 21 pass the House, we saw overwhelmingly bipartisan majority support, and we would really like to see the Senate do the same. We are seeing good momentum and we're cautiously optimistic we'll continue to see this momentum through the fall. But as these things go they are difficult to predict. The proposed laws will offer clearer regulatory guidelines, which will reduce the legal uncertainties in the industry and encourage even greater institutional participation in the crypto market. With these, Coinbase can expect increased trading volumes and higher revenues in the future. Furthermore, with the CFTC likely to gain more regulatory authority, digital assets could be classified much better than they currently are under the SEC. To this point, industry defiance against the Securities and Exchange Commission (SEC) has been growing. For instance, the Blockchain Association has sued the SEC over new rules that broaden the definition of what constitutes a "dealer" of securities. They argued that the SEC has overstepped their authority. Ethereum's co-founder, Joe Lubin, has also described the SEC's actions as "gaslighting." Lubin is seeking to clarify the regulatory boundaries by arguing that the SEC is unjustly expanding their jurisdiction. While the SEC is attempting to assert control, their efforts may not be as effective as anticipated in curbing the activities of major crypto platforms. As these multi-prong efforts move forward, I think it'll lead to a more defined and potentially less restrictive regulatory environment that will allow platforms like Coinbase to operate with even greater stability. A more stable Coinbase should trade at a higher valuation in my opinion. Valuation Despite a spat of downward revisions in earnings estimates for Coinbase, the market still anticipates a strong financial performance going forward. The current forward revenue growth estimate is approximately 21.66%, which is significantly higher than the sector median of 5.33%. In fact, to be specific, this is a 305.43% premium to the sector median. While Coinbase's forward price-to-earnings (P/E) ratio feels high at 36.46 , standing at a premium of 220.07% over the sector median of 11.39, it's actually a lower premium than what we see with the revenue growth. Despite the surface high P/E ratio, I think the market is actually not overestimating Coinbase's potential based on revenue expectations. If Coinbase were to recover to a ~300% premium to the sector median based on revenue growth, this would give investors some significant upside and allow the market to fully price-in the growth expectations. At a roughly 300% premium, we could see an upside of around 36.32% for shares from here. Risks What's good is that crypto is being taken seriously in the US with several bills in Congress that seek to establish clearer regulations for the cryptocurrency industry. What's bad is that we are dependent on Congress to act. This will be inherently slow with absolutely zero guarantees. However, I actually remain optimistic. Recent developments by members of Congress while on the campaign trail suggest that the momentum for crypto-related legislation is still super strong. Senate Majority Leader Chuck Schumer has expressed a strong level of confidence that a crypto bill could pass the Senate by the end of the year, noting that the issue has garnered bipartisan support. As I mentioned above, industry insiders have speculated that Harris could be less bullish on crypto than the current Biden administration. Her ties to regulatory and financial figures who are skeptical of the industry have given them pause on the future of crypto in the US. I really think this is misguided. I think the current bipartisan nature of the legislative efforts will counterbalance these concerns. Both the Democrats and Republicans are now increasingly recognizing the importance of establishing a legal framework for digital assets. Any legislation passed is likely to have a strong foundation of support, in my opinion. On this same note, I've also noticed Coinbase is pushing for cryptocurrency to be a key election issue, particularly in swing states. The company is working to ensure that any future administration, including a potential Harris presidency, will continue to support the industry. Coinbase understands that political winds change, but they know this industry will come out ahead and navigate it in a favorable manner. I remain really optimistic. Bottom Line While Coinbase's shares have declined slightly since late June due to the downturn in crypto, I think the story remains intact, no matter who is in the White House. The business is more durable than it appears. Strong bipartisan support in Congress for advancing cryptocurrency legislation is helping hedge the presidential race, and it makes me feel good about the future. I still believe that Coinbase remains a strong buy. Buying crypto will soon be seen as something you do regardless of who is President. At this point, I think the bull market will accelerate. Buying and holding almost always tends to be the superior strategy. I think that's the same here.
