Coinbase (NASDAQ:COIN) provides financial infrastructure and technology for the crypto economy. The company primarily serves as a broker through its marketplace on which users can buy and sell crypto assets. Since its IPO in April 2021, Coinbase stock is down 11%, and the stock is down nearly 20% since reporting Q3 earnings in November. These returns are well below the S&P 500's year-to-date return of 25%. Is this an opportunity to buy Coinbase on the dip? Let's dig in and find out.
The test of crypto volatility
Crypto can be an overwhelming and intimidating asset class. When it comes to considering crypto for your portfolio, there are several different tokens to choose from, many of which have unique use cases and applications. With Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) hitting all-time highs multiple times in the same year, it's easy for investors to think that it's too late to get involved.
It is important to keep in mind that the financial results for companies such as Coinbase may fluctuate dramatically quarter to quarter, given the volatility associated with cryptocurrencies. Unlike a steady growth company with highly recurring subscription revenues, Coinbase relies heavily on transaction fees. These fees will experience ebbs and flows as enthusiasm for crypto and widespread adoption begin to take hold.
After a few quarters as a public company, Coinbase is growing exponentially, even in a turbulent market. Despite missing revenue and earnings estimates in Q3, Coinbase still grew revenue over 300% year over year, from $287 million in Q3 2020 to $1.2 billion in Q3 2021. The company remains highly profitable, reporting a 54% net profit margin through the first nine months of 2021, compared to 21% for the same period in 2020.
The rise of NFTs
Despite dramatic volatility in cryptocurrency, one theme in 2021 has remained constant. The introduction of non-fungible tokens, or NFTs, has opened the floodgates with newcomers in the crypto arena. An NFT is a unique kind of crypto asset. Unlike "fungible" assets like Bitcoin and dollar bills, every NFT is special and can be used to authenticate ownership of digital assets like artwork, recordings, virtual real estate, or virtual pets.
A Q3 report from nonfungible.com illustrates that the NFT market is evolving at an exponential rate. Active wallets increased over 100% from roughly 204,000 in Q2 to about 413,000 in Q3. NFT buyers increased by 167% from roughly 98,000 in Q2 to about 260,000 during the third quarter, and sellers increased by over 200%, increasing from about 40,000 to roughly 123,000. The amount of U.S. dollars exchanged for NFTs increased from $782 million in Q2 to $5.9 billion in Q3.
The growth in NFTs has not gone unnoticed. In early October, Coinbase acknowledged that the company was building its own NFT marketplace. Shortly after this development, Coinbase stock received increased price target revisions, and the stock rocketed about 40% from the date of the press release to the announcement of Q3 earnings on Nov. 9. Coinbase's profitability profile provides it with a high level of capital efficiency, thereby allowing it to invest in innovative products and services such as NFTs. As an investor, these developments excite me, as they are yet to contribute revenue and margin to the company on a pro forma basis.
Investors rerate risk
I feel that euphoria in the crypto space pushed Coinbase stock to get ahead of itself shortly after its April IPO. As a result, Coinbase has a wide range between its 52-week low of $208 per share and its 52-week high of nearly $430 per share. However, I don't think that the pullback in Coinbase since its Q3 earnings report is based on its current financial profile or growth rates, but rather broader market conditions as they relate to potential interest rate hikes and inflation concerns.
If you are looking for exposure to crypto but are overwhelmed by the volume of different tokens and underlying volatility of different crypto assets, Coinbase may be worth a look for your portfolio. I view Coinbase as a way to invest passively in the broader crypto economy without settling on specific assets or applications within the space. With the stock down nearly 20% since its last earnings report, now seems like a great time to initiate a position.