Coinbase’s situation ‘tenuous’ despite ‘better than feared’ Q2 results

The sources of 36% of Coinbase’s second quarter net revenue are “at risk” going forward, Berenberg Capital Markets analyst notes

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Coinbase’s second quarter earnings results reflected headwinds foreseen by various analysts — but not to the extent some had expected.

Still, the print indicates the crypto exchange is in a “tenuous” scenario, one industry watcher told Blockworks.

Analysts had predicted quarter-over-quarter declines in trading volumes and adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — as well as lower interest income from USDC.   

All of that occurred, yet adjusted EBITDA stayed positive for the second straight quarter, executives pointed out during the crypto exchange’s earnings call Thursday.

A look at the numbers

Coinbase had improved its adjusted EBITDA from a $124 million loss in the fourth quarter of 2022 to a gain of $284 million in the first three months of 2023. Though that number dropped 32% to $194 million, it remained in the black. 

Owen Lau, executive director at Oppenheimer and Co., predicted last month that Coinbase’s adjusted EBITDA could fall by 90% to $29 million.

“It was a better than feared quarter,” he said Friday.

Coinbase’s second quarter net revenue dropped to $663 million — a 10% dip from the prior quarter. The exchange, which posted a net loss of $79 million during the first three months of 2023, notched a net loss of $97 million from April to June. 

The company’s revenue and loss per share — amounting to $0.42 — exceeded analyst estimates

The second quarter “marked continued progress in our journey to build a company that is increasingly efficient and financially disciplined,” Coinbase said in its Thursday shareholder letter.

Management indeed controlled its costs well, Lau noted. Total operating expenses fell from $896 million in the first quarter to $781 million in the second quarter — a 13% decrease.

“The stock could be volatile in the near term, but it is likely that consensus estimates will go up after this report,” Lau said.

Coinbase’s stock price was $90.75 at about 11 am ET Friday, essentially flat on the day.

Analyst: Company’s situation ‘tenuous’

“While much of the initial focus on Coinbase’s print was on its net revenue beat, we think a closer look at the details of the report shows that the company’s situation is tenuous,” according to Mark Palmer, analyst at Berenberg Capital Markets. 

Interest income from USDC and staking revenues amounted to $151 million and $87 million, respectively, he noted — representing roughly 36% of Coinbase’s net revenue for the quarter.  

“Both of those sources are at risk, in our view,” Palmer told Blockworks. “USDC’s market cap has continued to fall, while staking has been targeted by both the [Securities and Exchange Commission] and 10 US states as a means of issuing unregistered securities.”

Read more: Why USDC’s market cap is half of what it was a year ago

The National Defense Authorization Act (NDAA) could lead to new compliance requirements on USDC that could reduce the stablecoin’s usage, further complicating things for Coinbase, Palmer added. 

Lau, in a research note, pointed to positive regulatory developments in the courts and the House — such as the proposed Financial Innovation and Technology for the 21st Century Act — as gradually reducing Coinbase’s downside risk.

Coinbase’s second quarter transaction revenue decreased 13% from the prior quarter to $327 million. This was driven by a 37% quarter-over-quarter drop in trading volume.

The company reported $110 million of transaction revenue in July, which Palmer said was surprising.

“This implies that the company got no bump amid the surge of enthusiasm that followed the Ripple ruling,” he noted.


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