Coinbase Global recently published its fourth-quarter earnings report, revealing a mixed outlook for the cryptocurrency exchange amid ongoing market challenges. While results exceeded earlier expectations, the firm remains significantly impacted by a major downturn in cryptocurrency prices, which has adversely affected its trading, staking, and custody services.
Morningstar has adjusted its fair value estimate for Coinbase shares from $188 to $160, citing a substantial reduction in anticipated trading revenue due to a notable decline in cryptocurrency valuations. Since reaching a peak in October, the overall market capitalization of cryptocurrencies has plummeted by over 45%. The firm projects trading revenue will drop by 20.6% in 2026, with a recovery not anticipated until 2028. This downturn is only somewhat mitigated by growth in Coinbase’s subscription and service revenue, which is expected to rise by 14% next year, mostly attributed to its stablecoin business.
Despite the challenges posed by fluctuating cryptocurrency prices, Coinbase has made strides in decreasing its vulnerability by enhancing its recurring revenue stream and diversifying its operations. While substantial declines in earnings are expected, the company should remain profitable, a marked improvement compared to the dramatic losses experienced during the 2022 crypto winter.
With a 3-star rating, Morningstar believes Coinbase stock is fairly valued relative to its long-term fair value estimate. Current trading conditions are heavily influenced by market activity, the trajectory of trading fees, and interest income projections from the firm’s partnership with Circle for the stablecoin USD Coin (USDC).
Morningstar assesses that Coinbase lacks an economic moat, despite its position as a leading cryptocurrency exchange in the United States. The firm has strategically positioned itself as a trustworthy and regulation-compliant platform in a sector often marred by risk and regulatory challenges. This strategy has enabled Coinbase to command fees higher than many of its competitors, fostered by recent developments like the collapse of rival exchange FTX.
In terms of financial stability, Coinbase is positioned solidly with a reported cash reserve of over $11.2 billion and nearly $2 billion in cryptocurrency investments, juxtaposed against $7.2 billion in debts. Maintaining strong cash reserves is crucial for navigating the unpredictable nature of cryptocurrency markets, allowing the company room to operate during periods of financial downturn.
However, the company’s risk and uncertainty profile is significant. Its revenue is largely tied to trading fees, which are inherently volatile and susceptible to the broader cryptocurrency market cycles. In 2022, Coinbase’s revenue saw a sharp decline of over 59% year-on-year, emphasizing its exposure to fluctuating market conditions. While developments such as growth in its stablecoin revenue stream help cushion these risks, Coinbase remains deeply influenced by market performance and interest rate changes.
Supporters of Coinbase argue that a more favorable regulatory environment could enhance operational clarity and growth opportunities in the U.S. cryptocurrency market. Additionally, the increasing adoption of stablecoins could position Coinbase to experience substantial growth in revenue from its USDC product. Some proponents also see potential in global market expansion pending regulatory approvals from various international jurisdictions.
Conversely, critics point to the cyclical nature of cryptocurrency markets, which could continue to exert pressure on Coinbase’s revenues if low prices persist. They also caution that improved regulation might attract more competition in its core U.S. market. Furthermore, as Coinbase’s stablecoin revenue is linked to interest rates, a decline in rates could negatively impact its income.
Overall, while Coinbase navigates significant challenges, its ability to adapt and innovate amid fluctuating market dynamics will be key to its future trajectory in the evolving cryptocurrency landscape.
