Rising Interest Rates Partially Offset the Damage From Low Trading Volume in Coinbase’s Q4 Results

No-moat-rated Coinbase COIN reported weak fourth-quarter results that were largely in line with our expectations as the company continues to be affected by weak cryptocurrency markets but benefited materially from higher interest rates. The company’s net revenue fell 76% from last year, but increased 5% sequentially to $605 million. Net income fell from a gain of $840 million last year to a loss of $557 million this year. As we incorporate these results, we are maintaining our $90 fair value estimate for Coinbase. We do see the shares as undervalued at current prices, but we emphasize to investors that despite higher interest income, Coinbase’s results are still heavily reliant on cryptocurrency prices and market volume, which are highly volatile, and the company will need to execute well on its planned cost reductions.

The main driver behind Coinbase’s revenue decline was lower transaction revenue, as lower cryptocurrency prices and the well-publicized collapse of Coinbase’s rival FTX have diminished interest in cryptocurrency. Trading revenue decreased 86% from last year and 12% sequentially to $322 million. The decrease in trading fees was driven by lower volume from Coinbase’s retail users, which generate 95% of the company’s transaction fees, with retail volume falling 23% from last quarter and 88.7% year over year.

The bright spot in Coinbase’s results was undoubtedly its subscription and service revenue, which rose 32.5% year over year to $283 million. This was thanks to higher interest income, which rose 79% from last quarter to $182 million, helping offset the decline in trading revenue. Coinbase generates interest income from client assets held on its platform and through its participation in the USDC stable coin, with around 80% of Coinbase’s interest revenue coming from USDC. The strength of Coinbase’s interest income growth was primarily due to higher rates not higher balances, making the company a beneficiary of the Federal Reserve’s rate hikes.