Markets
Is Coinbase (COIN) a Buy on US Government Crypto Contract Win?
Coinbase COIN recently signed an agreement with the Justice Department’s U.S. Marshals Service to provide custody and trading of its $32.5 million worth of digital assets. According to a report in The Street, the U.S. government is the largest holder of cryptocurrencies at the nation-state level, holding more than $13.8 billion in cryptocurrencies, according to Arkham Intelligence.
COIN, the largest U.S.-registered cryptocurrency exchange, provides financial infrastructure and technology for the crypto economy in the U.S. and abroad. Thus, choosing COIN as a custodian is a smart move by the U.S. Marshals Service, a federal agency responsible for asset forfeiture, including crypto asset confiscation. COIN stores over 12% of the total cryptocurrency market capitalization on its platform.
Under the agreement, its institutional platform, Coinbase Prime, will securely store U.S. Marshal Service cryptocurrencies and execute the sale, trading or exchange of high-value cryptocurrencies on behalf of the U.S. Marshals Service.
The Cryptocurrency Market and Coinbase
In the first quarter of 2024, crypto asset volatility increased sharply, although it remained below its all-time high. On the other hand, the cryptocurrency market capitalization reached a 52-week high of approximately $2.8 trillion during this period, likely due to the launch of Bitcoin ETFs. In January of this year, the Securities and Exchange Commission approved 11 Bitcoin spot exchange-traded funds.
The cryptocurrency market is highly volatile and has recently experienced a downturn. The market cap fell by 5.5% in the last trading session. While Bitcoin, the largest cryptocurrency, lost 5%, Ethereum, the second-largest cryptocurrency, lost about 6%. Needless to say, an interest rate cut by the Fed will increase volatility and, therefore, benefit the cryptocurrency market.
Coinbase is expected to benefit from the increased volatility of cryptoassets and cryptoasset prices. It expects subscription and service revenue to be in the range of $525 million to $600 million, given the stability of cryptoasset prices. It is increasing its market share in the US spot and derivatives markets, expanding its product portfolio, and penetrating the international market. Apart from this, the growth of stablecoins is expected to fuel the company’s revenue.
With higher trading volume, COIN expects technology and development expenses and general and administrative expenses to increase sequentially by $660 million to $710 million in the second quarter of 2024.
Coinbase Financial Markets and Coinbase International Exchange both show promising growth in their early days. Its institutional business benefits from Bitcoin ETFs.
The story continues
Price/performance ratio
Coinbase shares have gained 28.3% year to date, outperforming the sector’s 2.6% gain, the Financials sector’s 6.1% gain and the Zacks S&P 500 composite’s 16.1% gain over the reporting period. Its outperformance is driven by product expansion, operational expertise and a strong crypto market.
COIN Outperforms Industry, Sector and S&P YTD
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Actions of Robinhood Markets HOOD and Interactive Brokers Group, Inc. IBKR, two other crypto-focused stocks, are up 79.9% and 51.4%, respectively, year-to-date.
Northbound Estimate Revised
The Zacks Consensus Estimate for COIN’s 2024 and 2025 earnings has increased 2.6% and 43.6%, respectively, over the past 60 days.
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Return on invested capital
Return on invested capital over the past 12 months was 14.5%, better than the industry average of 5.9%, reflecting the insurer’s efficiency in using funds to generate revenue.
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Premium assessment
COIN stock is currently expensive. It trades at a price-to-earnings ratio of 53.2, higher than the industry average of 24.7. However, given the growth outlook, rising estimates, and better ROE, a premium valuation is warranted.
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Coinbase Growth Plan
To accelerate its growth, Coinbase is deepening its roots in international markets. It is now registered as a restricted broker with the Canadian Securities Administrators, making it the largest and first international cryptocurrency exchange registered in Canada.
Strengthening banking connections, securing new licenses and expanding tailor-made product lines to meet unique customer preferences are helping COIN reach new heights.
The company is looking to increased adoption of cryptocurrencies because it believes that “growing the crypto economy means fostering safe and efficient markets.” It is thus prioritizing the utility of cryptocurrencies by investing in foundational infrastructure and platforms like Base, which is designed to optimize Ethereum’s infrastructure by increasing the speed and accessibility of the network. Notably, Base has significantly reduced transaction fees and increased transaction speeds. The company estimates that transaction expenses in Q2 2024 will average 15% as a percentage of net revenue. COIN remains focused on maintaining a low-cost structure.
Conclusion
COIN’s efforts to accelerate the growth of the cryptocurrency market, increase market share in spot trading on mainstream and institutional trading platforms, and improve the trading experience along with continued innovation and cost control initiatives make this Zacks Rank #1 (Strong Buy) stock a strong contender for portfolio addition.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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Interactive Brokers Group, Inc. (IBKR): Free Stock Analysis Report
Coinbase Global, Inc. (COIN): Free Stock Analysis Report
Robinhood Markets, Inc. (HOOD): Free Stock Analysis Report