Coinbase (NASDAQ: COIN) shares made their debut on the tech-focused NASDAQ stock market last week. Given the cryptocurrency boom, it’s hard not to get sucked in by this particular initial public offering (IPO).
I normally don’t buy stocks at IPO or straight after due to lack of transparency and volatility. In fact, I’ve written about the four things I’d consider before buying in to an IPO, which can be extended to Coinbase shares.
For now, I’ll be watching the stock closely. But here’s my take on the company.
What does Coinbase do?
Coinbase is a cryptocurrency exchange where investors can buy, sell and hold the digital assets. It earns most of its money by charging a fee per crypto transaction.
The company was founded in 2012 and since then it has grown phenomenally. What started off with Bitcoin has evolved. Customers now have access to over 90 different cryptocurrencies through the platform.
Coinbase serves three types of customers. These include retail users, institutions and ecosystem partners. I’m not surprised that it has 43m retail users. But I was encouraged to see that it has 7,000 institutional clients. These include hedge funds and money managers. I guess the more companies adopt cryptocurrencies, the number of institutional investors using Coinbase is likely to increase.
The company provides ecosystem partners the technology and services for them to develop applications that use cryptocurrencies. This makes sense to me, as it builds Coinbase’s credibility in its sector.
The company has been around for almost a decade. The boom in cryptocurrencies means that Coinbase is generating revenue and profits. In fact in 2020, it achieved $1.3bn in sales and net income of $322m.
But I think it’s worth highlighting that in the previous year, the company made a $30m loss. This may mean that profitability could be volatile, especially as it operates in a young asset class such as cryptocurrencies.
Even CEO and co-founder Brian Armstrong has said that investors can “expect volatility” in Coinbase’s financials given “the price cycles of the cryptocurrency industry”. Here, I’ll read between the lines and take this as a warning that investors should be able to stomach the potential volatile nature of Coinbase shares.
Armstrong has also highlighted that the company “may earn a profit when revenues are high and may lose money when revenues are low”, but its “goal is to roughly operate the company at break-even, smoothed out over time”.
I guess this is another warning to investors to avoid getting comfortable with the idea of increasing or stable profitability. The idea is to grow the company, but at the expense of profit-margin growth. For this reason, I’m only watching Coinbase shares for now.
I like that Coinbase is making cryptocurrencies widely available to investors, but the stock does come with some risk.
The US has announced that it’s looking to increase regulation in the cryptocurrency market. Turkey has also banned any payments for goods and services using such digital assets. This could impact Coinbase shares.
I’m not comfortable with buying the stock. I’ll wait to see what further announcements it releases as a public company before dipping my toe in.
Nadia Yaqub has no position in any of the shares and cryptocurrencies mentioned. The Motley Fool UK owns shares of and has recommended Bitcoin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.