Coinbase Earnings: Net Income Declines as Lower Volatility Drives Down Trading Volume

Key Morningstar Metrics for Coinbase

• Fair Value Estimate: $130.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Coinbase’s Earnings

Coinbase COIN reported second-quarter results that were a bit worse than we expected. Revenue increased 108% from last year but declined 13% from the previous quarter to $1.38 billion. Meanwhile, net income increased to $36 million from a loss of $97 million last year, though this includes $248 million in after-tax losses on the firm’s cryptocurrency investment portfolio. As we incorporate these results, we do not plan to materially alter our fair value estimate of $130 per share.

Coinbase’s transactional income increased 139% from last year to $781 million. Retail trading income (the firm’s largest source of revenue) increased to $664.8 million from $289 million last year, though this was a sharp drop from the $935 million reported last quarter. We expected some sequential headwinds in trading revenue despite higher average cryptocurrency prices in the quarter. First-quarter results enjoyed the benefit of a major rally in cryptocurrency, which drove high volatility and trading volume. That said, the drop in US retail trading activity was a bit steeper than we expected (though cryptocurrency markets are inherently volatile), and we caution against extrapolating too much from sequential trends.

On a more positive note, Coinbase’s subscription and services had another strong quarter, with revenue increasing to $599 million from $335.4 million last year. The star of the show was Coinbase’s USDC revenue, which increased 59% year over year and 22% quarter over quarter to $240 million. While USDC’s market capitalization is still well below its old high (a lingering legacy of becoming caught up in the failure of Silicon Valley Bank), the stablecoin is clearly on better footing. Still, this line item will likely begin to face headwinds. As a reminder, Coinbase generates its stablecoin revenue through interest on collateral used to maintain its peg to the US dollar, and anticipated interest rate cuts will directly impact this revenue.