Finance
Down 42%, is it time to buy the dip on this growth stock?
The highest-flying digital assets are certainly getting a lot of attention from investors. For those who aren’t ready to fully jump in, owning a business like Coin base (NASDAQ: MINT) perhaps an idea worth considering.
But even this top crypto company has taken investors on a volatile journey. The company’s shares rose 391% in 2023, before rising 19% this year (as of August 26). However, they are trading 42% below their peak price from the 2021 bull market.
Is it time to buy the dip on this crypto? growth stock?
Riding the momentum of the crypto market
After the crypto winter starting in 2022, Coinbase’s growth has been remarkable. Net sales increased 50% in the fourth quarter of 2023 due to rising market prices for digital assets. The momentum has continued this year, although transaction costs fell significantly between the first and second quarters.
Coinbase is a leading brokerage and exchange company serving the cryptocurrency industry. When there is bullish sentiment from investors and traders, this naturally drives activity on the platform. The result is a financial windfall for Coinbase. But the opposite is also true: a bear market can create powerful headwinds.
The leadership team, led by founder and CEO Brian Armstrong, is fully aware of this unfavorable trait. That’s why they’ve tried to create a more predictable business model, one that relies less on trading volume and more on recurring revenue.
Coinbase sees strength in areas like stable coins, blockchain rewardsand custody fees. This segment, known as subscriptions and services, grew 79% year-on-year in the second quarter (ending June 30). It represented 43% of total sales, a dramatic increase from a 5% share just three years ago. Coinbase’s main goal is to usher in a new era in the industry, one characterized by greater utility of crypto and blockchain, as opposed to financial speculation.
Not an easy stock to own
At their low point in late 2022, the shares traded at a price of price-to-sales (P/S) ratio of less than 1.5. But after the stock’s huge comeback, the valuation is less attractive. Today we are talking about a P/S multiple of almost 11.9. This is very expensive in my opinion and it shows that the market is extremely enthusiastic about the company.
That perspective doesn’t change even when you realize that Coinbase more than doubled its revenue between the first six months of 2024 and the same period last year. And operating income came in at $1.1 billion, compared to a loss of $197 million in the first two quarters of 2024. That’s an impressive turnaround, but things could turn sour in an instant if market conditions deteriorate, as they likely will, if history is any indication.
Add these wildly unpredictable financial results to Coinbase’s steep valuation, and it’s extremely difficult for any investor to buy and own the stock for the long term. But I can still understand why the company would be on your radar.
There may be investors who want exposure to the cryptocurrency industry without having to choose and own specific digital assets, such as Bitcoin or Ethereumfor example directly. Perhaps they consider this venture too risky.
Here Coinbase looks attractive. It provides exposure to a company, through stocks, that serves the overall crypto industry. And to further clarify the connection, Coinbase’s ultimate success depends on the success of the market. If crypto and blockchain technology become a more important part of our daily lives in five or ten years, I would be shocked if Coinbase didn’t benefit from it as much.
Investors who are bullish on the sector, have a high risk tolerance and a longer time horizon are the only ones who should buy this stock.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has one disclosure policy.
Down 42%, is it time to buy the dip on this growth stock? was originally published by The Motley Fool
