Is Coinbase’s stock worth the volatility?

Coinbase’s [COIN] stock hasn’t been making coin for investors. Since the start of the year the stock has dropped 26% (as of 25 January’s close) as it absorbed the same punishment being meted out to other tech stocks. Namely a steep selloff as investors get jittery over the possibility of several hikes in interest rates. Then there’s the plummeting price of bitcoin which is adding further pressure.

On Friday Coinbase’s stock dropped a steep 13.38% to close the week at $191.97 a share. Those losses have continued into this week, with the stock closing Tuesday at just over $185. And the wider Nasdaq seemingly still in the midst of correction, some may view the stock as too risky a bet. However, should the market rout begin to bottom out, does Coinbase’s current share price represent good value?

What drives Coinbase’s stock price?

Coinbase has suffered from volatility on two fronts: the current selloff and fluctuations in the price of cryptocurrencies. What’s happening with Coinbase’s stock right now broadly matches the decline in the price in Bitcoin. Since 9 November, Bitcoin has gone from north of $62,000 to around $36,667 on Tuesday 25 January, with its 45% - a near reflection of Coinbase’s share price descent.

Naturally this level of volatility will deter many investors, but underlying business performance has been strong. The firm consistently posts strong figures in quarterly earnings, generating a 300% year-on-year revenue growth in Q3 2021.

Yet unlike Robinhood [HOOD], which offers other instruments, Coinbase is focused on providing a platform to buy and sell cryptocurrency. And considering that Coinbase makes the bulk of its income through trading volumes, any slump in the buying and selling of the likes of Bitcoin and Ethereum is going to be a problem.

In the third quarter, Coinbase saw trading volumes slow leading to net revenues falling to $1.24bn, well below the $2.23bn seen in the previous quarter. And while the company has said it expects things to improve in the fourth quarter, that will only be borne out once the next set of quarterly earnings hit the markets.

Competition could also be a factor this year. More financial services providers are now taking cryptocurrencies seriously, while Block [SQ] and Robinhood are emerging threats. However, it is likely that a rebound in the price of bitcoin - and subsequent trading volumes - is going to be the short to mid-term driver of Coinbase’s stock.

Can NFTs unlock revenue growth?

A burgeoning NFT market could help Coinbase’s investment case. The crypto exchange has teamed up with Mastercard [MA] to offer Coinbase NFT, a marketplace that the crypto exchange says ‘will make minting, purchasing, showcasing, and discovering NFTs easier than ever.’

For the uninitiated, an NFT is a unique piece of data that can’t be replicated and is stored on a blockchain - sort of like a proof of ownership. And they’re big business. In 2021 the market for NFTs had ballooned to a whopping $40bn.

Up until now, if someone wanted a non-fungible token (NFT) for a piece of digital art, they’d need to purchase it through cryptocurrency ethereum. Through Coinbase NFT a customer would be able to use a standard Mastercard to buy an NFT, reducing the barrier to entry.

“Coinbase wants to simplify the user experience to allow more people to join the NFTs community. Just as we helped millions of people access Bitcoin for the first time in an easy and trusted way, we want to do the same for NFTs,” Coinbase said in a press release.

What the analyst think

At the start of January, JP Morgan’s Kenneth Worthington wrote that the use cases for cryptocurrencies will continue to grow, with Coinbase benefiting from market growth. Worthington has a bullish $447 price target on Coinbase to go with his Overweight rating. Cathie Woods is also backing Coinbase, with Ark Investments having purchased almost 300,000 shares in the exchange so far in January.

Slightly more circumspect is Citi’s Peter Christiansen who trimmed his target from $415 to $300 off the back of a drop in the total market cap of cryptocurrencies. Christiansen still has a Buy rating on Coinbase.

Among the analysts polled by Refinitiv, Coinbase’s stock has a $374 price target - which suggests a monster 102% upside on Tuesday’s close. However, in an environment where stocks considered overvalued are seeing steep declines, it’s worth noting that Coinbase trades at a 35.21 forward price to earnings multiple - not exactly cheap.

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