As the price of Bitcoin has slumped over the past few days, companies with exposure to the cryptocurrency industry have also declined in value. That includes Coinbase (NASDAQ: COIN) shares.
However, unlike Bitcoin, Coinbase is a functioning business with sales and cash flows. This makes it easier to value the enterprise. In addition, demand for the company’s services has also been increasing recently.
As such, I’ve been considering using the current decline to buy an initial holding of Coinbase shares for my portfolio as a long-term investment in the cryptocurrency sector.
Valuing Coinbase shares
Coinbase has really reaped the rewards of the crypto boom. The company generates the majority of its revenues from transaction fees on its platform.
Therefore, just like any other exchange or trading platform, the company makes more money when volatility’s high. That means there are more buyers and sellers on the platform and, as a result, more trading fees.
The company’s first-quarter results showed just how much of an impact the current trading frenzy has had on its profits and sales. Revenues totalled $1.8bn in the first quarter of 2021, up from $585m in the fourth quarter of 2020 and $191m a year ago.
And as revenues jumped, so did profits. The company’s net earnings for the quarter were over $771m. For the fourth quarter of 2020, Coinbase earned just $177m.
As the company generates the majority of its income from trading fees, it should continue to earn healthy profits, no matter what the Bitcoin price does. That’s an excellent quality. It also makes it easier to value Coinbase shares.
In the first quarter, earnings totalled $3.05 per share. That implies the group is on track to earn $12.20 per share in its current financial year. At the current stock price of around $218, these numbers suggest the company is trading at a price-to-earnings (P/E) ratio of 18. I think that looks relatively cheap for a high-margin tech business.
Still, I should caution these are just rough estimates. There’s no guarantee the company will earn $12.20 in the current financial year. What’s more, there’s no guarantee consumers will continue to use the platform if the price of Bitcoin collapses completely.
Coinbase shares could be attractive at current levels if the company continues to see high levels of trading. The problem is, the crypto industry is highly unpredictable.
Therefore, I can’t say how the business will perform over the next 12-24 months with any level of certainty. That’s why I won’t be buying Coinbase shares right now.
Overall, I think the crypto industry is still in its infancy and as it grows up, it’s going to be challenging to pick the winners and losers. Coinbase has captured a significant amount of market share so far.
However, there’s no guarantee the company will remain the favourite platform of crypto traders as we advance.
The post As Bitcoin slumps should I buy Coinbase shares? appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the shares 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.
Motley Fool UK 2021