Coinbase Ends 2021 with a Record Breaking Q4

No-moat Coinbase COIN reported strong fourth-quarter results, with the company seeing new all-time highs in both revenue and trading volume as high cryptocurrency prices and the continued adoption of cryptocurrency attracted new users to its platform. Coinbase reported EPS of $3.32 and the company’s revenue grew 102% from last quarter to $2.5 billion. However, the strength of the quarter is partially overshadowed by rising expenses, with the firm guiding for a significant increase in spending in 2022, as well as weaker cryptocurrency prices since the start 2022. Coinbase’s results are highly correlated to cryptocurrency prices, a consequence of its reliance on retail trading fees. Given the significant volatility of the cryptocurrency market, Coinbase’s growth is often unreliable and there is no expectation for the high volume seen in the fourth quarter to persist. As we incorporate these results, we are lowering our fair value estimate for Coinbase to $210 from $225 with the decline being the result of higher projected expenses.

The primary driver behind Coinbase’s success in the quarter was its retail trading revenue, which rose 384% year over year and 114% sequentially to $2.19 billion. Retail trading revenue benefited from both higher trading volume than last quarter, $177 billion versus $93 billion, as well as a recovery in the firm’s pricing, with average retail trading fees rising to 1.23% from 1.1%. While Coinbase delivered impressive revenue growth during the quarter, expenses also grew rapidly as the firm increased investments and added another 950 employees during the quarter. Operating expenses were up 54.5% quarter over quarter, with the largest driver being marketing spending. Coinbase also guided for significantly higher expenses in 2022 with transaction costs and marketing expected to be in the low 20s and low teens of revenue, respectively. The midpoint of the firm's guidance also calls for administrative and technology spending to double from 2021.

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