Coinbase: Buy the Dip?

© Provided by The Motley Fool Coinbase: Buy the Dip?

Spurred by rapidly rising interest rates, the cryptocurrency market drawdown in 2022 wiped out roughly $1.4 trillion of value from the asset class. Investor appetite waned as they sought out safer places to park their capital in a period when uncertainty was elevated. Additionally, the failures of multiple major crypto firms shined a spotlight on just how much the regulatory framework needs to improve. 

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One of the most popular cryptocurrency companies, Coinbase Global (NASDAQ: COIN), saw its shares crater by 86% last year. And although the stock is up 78% in 2023 (as of this writing), it is still well off its all-time high. Does this mean now is a good time for you to buy the dip? 

Let's take a closer look. 

Freezing in the crypto winter 

In its short history, the crypto market has been characterized as a boom-and-bust asset class, driven almost entirely by waves of investor optimism and pessimism. And while the most fervent crypto supporters strongly believe that digital assets will produce compelling real-world use cases that are widely adopted, up to this point, cryptocurrencies have primarily been used as a tool for financial speculation. There is no denying this fact. 

For Coinbase, this means it must deal with the ebbs and flows of crypto prices. Last year was a historically bad year for the industry, and it's hard to argue that a big part of the market rout was caused by the Federal Reserve's tighter monetary policy. This also crushed stocks in 2022, for their first down year since 2008. 

Last year, Coinbase's revenue of $3.1 billion was 57% below 2021's total. And the business posted a net loss of $2.6 billion for the full year. It's no wonder the stock was hammered, as the crypto winter was in full force. 

Strong financials in good times 

But when the crypto market is moving up and to the right, as it did in 2021, Coinbase absolutely flourishes. That's because rising crypto prices attract users to the platform who see an opportunity to profit. In 2021, Coinbase generated $7.4 billion in revenue and $3.6 billion in net income, translating to a ridiculous profit margin of 49%. And the company's monthly transacting users peaked at 11.4 million in the fourth quarter of that year. Clearly, this can be a thriving business, but it all depends on market conditions, which are outside of Coinbase's control. 

A long-term mindset is necessary 

With this knowledge of just how outstanding Coinbase's financial performance can be in a robust market environment, there's one question that remains -- how much are investors willing to pay to own a business whose numbers are very unpredictable on a quarter-by-quarter basis? What's more, how much would they pay for a stock that has proven to be extremely volatile? Luckily, Coinbase shares are trading hands right now at a price-to-sales multiple of 4.4, which is close to about as cheap as the stock has traded for since the company went public in April 2021.  

However, one thing is certain. You shouldn't invest in Coinbase with a short-term mentality, as no one has any idea what will happen with the cryptocurrency market in the next six or 12 months, despite how many so-called market "experts" there are. Coinbase could have a bounce-back year in 2023 and see its sales and profit soar. Or the opposite situation is just as likely, with the business's struggles continuing. 

As a result of this near-term uncertainty, investors should only buy Coinbase stock if they firmly believe in the company's prospects over the long-term, say at least the next five years. And this hinges on the overall cryptocurrency market continuing to gain broader adoption not only in the U.S. but across the globe. Let's say that in 2028, there will be 1 billion crypto users worldwide, compared to the 400 million there are today, according to Statista. In this type of bullish scenario, it's hard to believe that Coinbase wouldn't be the dominant platform and gateway for users to access the crypto economy. What's more, as more institutions start to dabble in the space, Coinbase's focus on providing the best security, taking a regulatory-first approach, and having adequate custody solutions could drive greater interest from larger pools of capital. 

It all comes down to how bullish you are on the cryptocurrency industry. If you are, then buying Coinbase right now on the dip might be a smart financial move. 

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coinbase Global. The Motley Fool has a disclosure policy.