Coinbase (COIN -3.17%) has been an extremely volatile stock, to say the least. From the initial public offering in April 2021 through the end of 2022, it dropped a troubling 89%. But since then, it has catapulted 801% higher (as of Nov. 12). Despite the positive momentum recently, this top cryptocurrency stock has experienced gut-wrenching ups and downs.
You might be considering buying shares as they approach their all-time high. Before you do, here are three must-know facts about Coinbase.
Shifting the business model
Coinbase was launched more than 12 years ago to facilitate the trading of Bitcoin. The company's brokerage and exchange platform is still critical to the business, but not as much as in recent years.
During the three-month period that ended Sept. 30, Coinbase generated $572.5 million from transaction revenue. This comes from the activities of both individual and institutional investors. That sales figure has dropped sequentially in two straight quarters.
The rest of Coinbase's revenue comes from subscriptions and services. This includes stablecoin revenue and blockchain rewards, among others.
Management's goal has been to shift Coinbase's revenue structure to a more stable and predictable model. Crypto asset prices can be extremely volatile. As a result, a business dependent primarily on trading revenue can see its financial results fluctuate heavily from period to period. Building a company that has more recurring revenue is the goal.
Betting on the industry
Coinbase has its hands in virtually all areas of the cryptocurrency market, as I touched on above. To add to its exposure, the business also directly invests in private opportunities, which are likely crypto-related start-ups or digital tokens. As of Sept. 30, Coinbase had $700 million of these investments on the balance sheet.
Therefore, Coinbase can basically be viewed as a bet on the growth and success of the entire cryptocurrency industry. Only investors who believe crypto asset prices will rise over the long term and that the industry will become a more important part of people's lives in the future should buy the shares. It's difficult to envision a scenario where the crypto market becomes much larger and more valuable, yet Coinbase ends up being an unsuccessful investment.
However, to be clear, blockchain and cryptocurrencies are still a relatively new technology. So, there is still a lot of uncertainty as to the ultimate outcome when it comes to development and adoption.
Coinbase's valuation
Based on the overall crypto market's rise in the last week, investors appear to be bullish on what Donald Trump can do for the industry during his second term as President. What exactly this means is unknown, but a more accommodative administration could lead to favorable regulation of the industry. That could directly benefit a business like Coinbase by making it easier and cheaper to launch new products and services and enter new markets.
Indeed, Coinbase's stock has soared 74% since the start of November (as of Nov. 12), demonstrating the market's extreme optimism surrounding the business. The company now sports an $80 billion market cap.
Shares currently trade at a price-to-earnings ratio of 53.6. That's more than double the multiple of 26 from just a couple of months ago. I'd argue that the stock is priced for perfection right now, showcasing that investors believe there will be monster success in the near future.
However, it's extremely difficult to properly conduct a valuation exercise on Coinbase stock because the financial results can be so unpredictable on a quarter-by-quarter basis. The crypto market could continue soaring, or it could tank. This boom-and-bust reality is hard for investors to stomach.
If you're considering investing in this stock, you now have a better understanding of the revenue mix, Coinbase's position in the industry, and the valuation perspective.
