Coinbase Earnings: Better-Than-Feared Results as Cost-Cutting Partially Offsets Low Trading Volume

No-moat-rated Coinbase COIN reported weak second-quarter earnings that were not as bad as we had expected, as lower trading revenue and interest income hurt results. Coinbase’s net revenue fell 17.5% year over year and 10% sequentially to $662 million. Meanwhile, net losses narrowed to $97 million from $1.1 billion last year due to a dramatic decrease in the firm’s expenses.

While these results were not good, we had anticipated the weakness due to low cryptocurrency trading volume seen industrywide and the declining amount of USDC outstanding. Additionally, the firm’s expenses were lower than expected as Coinbase’s cost-cutting efforts continue to see success. As we incorporate these results, we do not plan to materially alter our $80 fair value estimate for Coinbase, and we see the shares as somewhat overvalued.

Coinbase’s trading revenue, its largest source of revenue, decreased 50% from last year and 13% sequentially to $310 million. The decrease in revenue was due to lower trading volume as average pricing improved due to Coinbase’s advanced traders, who typically pay lower fees, making up a smaller part of total volume. Trading volume was down 58% from last year, with retail trading volume falling 70%. Coinbase’s trading volume is highly volatile and is typically affected by cryptocurrency prices, which are inherently unpredictable. Coinbase’s heavy exposure to cryptocurrency markets remains a major source of risk for the firm.

On a more positive note, Coinbase’s operating expenses came in below guidance. Operating expenses of $781 million were 58% lower than last year and 13% lower than last quarter. During the peak of the cryptocurrency boom, Coinbase allowed its cost structure to grow out of control with the firm, and we see these expense reductions as a necessary step for the firm. Coinbase’s positive operating cash flow during the quarter is an indicator that the firm is now in a better position to withstand weak cryptocurrency market conditions.