Coinbase Q1 preview: Where next for COIN stock?

When will Coinbase release Q1 2022 earnings?

Coinbase is scheduled to publish first quarter earnings after US markets close on Tuesday May 10.

Coinbase Q1 earnings preview

Coinbase reaped rewards in the fourth quarter of 2021 as markets experienced record volatility and cryptocurrencies soared to new record highs.

However, Coinbase has warned that the favourable conditions didn’t persist in early 2022. It said in late February that volatility in the crypto market had fallen some 10% since the start of the year and prices have plummeted. For example, bitcoin is today trading closer to $36,000 after collapsing from the record high of around $68,000 briefly seen in early November, partly driven by the tough macroeconomic conditions dominated by uncertainty spawning from tightening financial conditions and other headwinds such as the conflict in Ukraine.

Subdued prices and reduced volatility tends to cause a drop in trading activity and the number of people using Coinbase to trade. The company said it was ‘not unusual’ for the market to suffer from softer periods after hitting new highs. As a result, Coinbase is forecast to report 9.6 million Monthly Transacting Users in the first quarter. That would be up over 56% from the year before but down from the 11.4 million it had on its books at the end of 2021. The users still utilising its platform are also trading less in the current environment and this will result in trading volumes remaining flat year-on-year at $335.6 billion and fall from the $547.0 billion reported in the previous quarter.

One way that Coinbase can soften the blow from lower transaction revenue is by continuing to grow revenue from subscriptions and services, such as its rewards programmes and custodial services, which tend to prove more resilient compared to the volatile nature of its core business. This only accounted for 7% of total revenue in 2021 but Wall Street believes this will grow to over 12% in the first quarter and come in at $183.6 million, up from just $56.4 million the year before. Growing recurring revenue would be welcomed by markets as this would help alleviate some of the challenges posed by the volatile nature of its core business.

Overall, these factors will weigh on revenue and earnings. Net revenue is expected to drop 18% year-on-year to $1.48 billion in the first quarter while adjusted Ebitda is forecast to plunge almost 69% to $359.7 million.

Compounding the slower growth and lower earnings is the fact costs are rising at a faster rate than the topline. Total operating expenses are forecast to amount to around $1.48 billion in the first quarter, some 82% higher than the year before. That reflects the fact Coinbase is expected to have almost trebled spending on R&D and G&A costs, while spending on marketing is set to almost double in the period. Coinbase has been busy hiring new staff to scale-up and working on new products and features to help drive engagement and attract new users. Transaction costs, which are broken out separately, are also forecast to rise over 30% in the first quarter.

This is all squeezing profitability. Coinbase said that ‘there is always the possibility that our planned expense growth may outpace revenue growth over the short term’, but said that it is focused on making the right investments now to deliver better growth over the longer-term.

The outlook will be closely watched considering cryptocurrency markets remain subdued, painting a bleak picture over the short-term. However, Coinbase remains bullish over the longer-term. CEO Brian Armstrong told Forbes just this week that he anticipates the platform will benefit from a massive influx of users over the next decade and that there will be over 1 billion people who have used crypto at some point by 2032. He said that a ‘substantial portion of GDP’ will be happening within the crypto economy over the next 10 to 20 years as more businesses embrace the potential of cryptocurrencies, blockchain and the wider theme of DeFi – or decentralised finance.

‘We enter 2022 with even more unknowns which make our business all the more difficult to forecast. On one hand, in addition to the unpredictability of crypto asset prices and volatility, we also face global macroeconomic headwinds, rising interest rates, inflation, and more recently, geopolitical instability. On the other hand, global crypto adoption is accelerating and diversifying, Coinbase said in February.

The company’s current guidance for 2022 is vague with wide ranges. It is targeting annual average MTUs of between 5 million to 15 million, but this could be tightened if the outlook becomes clearer as the year goes on. It is anticipating that average transaction revenue per user will return to pre-pandemic levels this year.

The final outcome in terms of MTU will be a key deciding factor in terms of how revenue and earnings fare this year. Coinbase said it expects to be profitable in 2022 if MTUs hit the middle-to-top-end of its guidance range but has warned it could see adjusted Ebitda losses of as much as $500 million if MTUs hit the low-end. Coinbase, which has around $7 billion in cash, said such losses would be ‘very manageable’ and means it can continue to invest in future growth despite current market conditions.

Where next for COIN stock?

Coinbase shares briefly hit an all-time low of $11.80 earlier this month but the stock is yet to close below $12.70, which needs to hold to avoid opening the door to unknown territory and fresh record lows.

Notably, the stock delivered a mild rebound after hitting that fresh low as it pushed the RSI into oversold territory, supporting the view that this should hold as a floor. If the stock can break out of the current downtrend, we could see it swiftly recapture the $150 before heading toward the 50-day moving average at $163. The 26 brokers that cover the stock believe there is huge upside potential over the next 12 months considering the average target price sits at $270, a level Coinbase last traded at back in December.

However, the fact trading volumes have increased markedly over the last five days, averaging some 32% above the 100-day average, while the share price has continued to struggle supports the view that the current downtrend could persist. Momentum is with the bears now, and the anticipation of weaker results this week could only add fuel to the fire.

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