Thanks to Bitcoin for making this stock so cheap in 2022

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The recent stock market sell-off has not spared crypto; Bitcoin is barely up over the past year and down almost 60% from its all-time high. Shares of cryptocurrency technology company Coinbase Global (NASDAQ:COIN) are facing a similar struggle, down by roughly the same amount.

Bitcoin and Coinbase tend to trade together, so the recent drop could be a great opportunity for investors to consider Coinbase as a long-term holding. Here’s why.

Image source: Getty Images.

Bitcoin Influences Coinbase Stocks

Coinbase is a cryptocurrency technology company, but its main business is its exchange which allows people to buy and sell crypto. It charges transaction fees for these transactions, generating revenue.

Users can buy and sell nearly 100 different cryptocurrencies on Coinbase, but Bitcoin and Ethereum are the two largest, contributing 21% and 22% of transaction revenue, respectively. All other cryptos total the remaining 57%.

Bitcoin price. Data by YCharts.

The strong connection between Coinbase and Bitcoin seems to influence how stocks trade. You can see in the chart above how they show almost identical price action.

But there is a crucial difference between the two assets: Coinbase’s stock price is a function of short-term supply and demand, but it is a real business that generates revenue and profits, which have tend to influence the value of a stock over the long term. The prices of cryptocurrencies, including those of Bitcoin, are almost entirely a matter of supply and demand; they have no underlying fundamentals, which could make them more volatile. Bitcoin’s recent price drop could influence Coinbase’s actions, regardless of the company’s underlying financials.

Exceptional financial services at a great price

Cryptocurrency has become increasingly mainstream in the investment community, both among retail users and among institutions. In Coinbase’s third quarter of 2021, trading volume grew to $327 billion, up from just $45 billion the year before.

This leap in volume created triple-digit revenue growth for Coinbase; third-quarter revenue was up more than 300% year-over-year, but was down from the prior quarter, indicating how activity can fluctuate based on crypto trading activity on the platform.

The business is very profitable because Coinbase does not need to spend much to maintain its platform. It turned 25% of its revenue into free cash flow in Q3 2021, and $406 million of its $1.2 billion in revenue fell to net income, a net profit margin of nearly 33%.

COIN revenue (quarter-over-year growth). Data by YCharts. YOY = year after year.

Analysts are looking for total revenue of $7.29 billion for 2021, which puts the stock at a price-to-sales ratio below 6, despite its meteoric growth. Expected earnings per share (EPS) for 2021 is $13.06, a price-to-earnings (P/E) ratio of just under 15.

The company is growing and profitable, but the stock is trading at nearly half Coca-Cola’s P/E ratio, which is producing mid-single-digit EPS growth!

Now, Coca-Cola is a more proven company than Coinbase, and investors might not yet be sure about the future of crypto, which would, in turn, mean that Coinbase’s long-term prospects are uncertain. However, financials seem easily justified by this low valuation. If sentiment towards crypto picks up going forward, it could create a lot of upside in Coinbase shares via a higher valuation.

A long path of growth

In other words, an investment in Coinbase probably means you believe in cryptocurrency as a whole. Assuming crypto has a long-term future, the company is well positioned for many potential growth opportunities. It will launch Coinbase Card, a physical payment card that allows you to spend all the assets in your Coinbase wallet (US dollars and cryptocurrencies), earning crypto rewards. Hardly any company accepts crypto as a form of payment, and while it’s not a straight-forward solution, it could significantly help crypto investors get more out of it.

Coinbase is also developing a marketplace for non-fungible tokens (NFTs), digital assets that use blockchain technology to authenticate and record their ownership. The waiting list for this marketplace is over 2.6 million names, potentially making it the largest NFT marketplace at launch. According to investment bank Jefferies, the NFT industry is small but growing rapidly and could reach $80 billion by 2025.

There might be ups and downs along the way

More and more people are adopting cryptocurrencies on a regular basis, so Coinbase’s role as one of the leading exchanges for these digital assets could lead to huge long-term growth. However, it is important to remember that Coinbase can be more volatile than most stocks.

Much of its current revenue comes from trading volume, which can fluctuate depending on the overall price level of cryptocurrencies. Coinbase could experience periods of explosive growth and then contract. Investors will want to keep this in mind and remember that it is the long-term trends that matter most. This is a young company in a rapidly growing industry; the road will probably be bumpy, but the destination could be worth it.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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