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Is Coinbase (COIN) a Winning Buy for US Government Cryptocurrency Contracts?
Monetary base COIN recently signed an agreement with the Justice Department’s US Marshals Service to provide custody and trading of its $32.5 million worth of digital assets. According to a report in The Street, the US government is the largest single nation-state holder of cryptocurrency, holding more than $13.8 billion in cryptocurrency, according to Arkham Intelligence.
COIN, the largest registered cryptocurrency exchange in America, provides financial infrastructure and technology for the cryptocurrency economy in the United States and internationally. Therefore, choosing COIN as a custodian is an appropriate decision by the US Marshals Service, a federal agency that deals with asset forfeiture, including the forfeiture of crypto assets. COIN stores over 12% of the total cryptocurrency market capitalization on its platform.
Under the agreement, its institutional platform, Coinbase Prime, will securely store U.S. Marshals Service cryptocurrencies and execute the sale, trading, or exchange of high-value cryptocurrencies on behalf of the U.S. Marshals Service.
The Cryptocurrency Market and Coinbase
The first quarter of 2024 saw a sharp increase in cryptocurrency volatility, although it remained below its all-time high. On the other hand, the cryptocurrency market cap reached a 52-week high of around $2.8 trillion in the said time frame, likely due to the launch of bitcoin ETFs. In January this year, the Securities and Exchange Commission approved 11 exchange-traded bitcoin spot funds.
The cryptocurrency market is highly volatile and has seen a downturn recently. The market capitalization dropped by 5.5% in the last trading session. While Bitcoin, the largest cryptocurrency, lost 5%, Ethereum, the second largest cryptocurrency, lost around 6%. Needless to say, an interest rate cut by the Fed will increase volatility and in turn benefit the cryptocurrency market.
Coinbase is set to benefit from increased volatility and cryptocurrency prices. It expects subscription and service revenue to be between $525 million and $600 million, given stable cryptocurrency prices. It is increasing its market share in the US spot and derivatives markets, expanding its product portfolio, and penetrating the international market. Aside from that, stablecoin growth should fuel this company’s bottom line.
Thanks to higher trading volume, COIN expects technology, development, general and administrative expenses to progressively increase from $660 million to $710 million in Q2 2024.
Both Coinbase Financial Markets and Coinbase International Exchange are showing promising growth in their early stages. Its institutional business is benefiting from bitcoin ETFs.
The story continues
Price Performance
Coinbase shares have gained 28.3% year-to-date, outpacing the industry’s gain of 2.6%, the Financials sector’s gain of 6.1%, and the Zacks S&P 500 Composite’s gain of 16.1% over that time frame. Its outperformance is supported by product expansion, operational experience, and a robust cryptocurrency market.
COIN beats industry, sector and S&P YTD
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Actions of Robinhood Markets HOOD and Interactive Brokerage Firm IBKR, two other cryptocurrency-focused stocks, have rallied 79.9% and 51.4%, respectively, since the beginning of the year.
Northbound estimate review
The Zacks Consensus Estimate for COIN’s 2024 and 2025 earnings has risen 2.6% and 43.6%, respectively, over the past 60 days.
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Return on investment
The return on invested capital over the last 12 months was 14.5%, better than the industry average of 5.9%, which reflects the insurer’s efficiency in using funds to generate income.
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Premium Rating
COIN is expensive at the moment. It trades at a P/E multiple of 53.2, higher than the industry average of 24.7. However, given the growth outlook, rising estimates and better return on invested capital, a premium valuation is justified.
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Coinbase’s Growth Plan
To accelerate growth, Coinbase is establishing its roots in international markets. It is now registered as a Restricted Dealer by the Canadian Securities Administrators, making it the largest and first international cryptocurrency exchange registered in Canada.
Strengthening banking ties, acquiring new licenses, and expanding its range of customized products to meet specific customer preferences are helping COIN reach new heights.
The company expects increased crypto adoption as it believes that “growing the crypto economy means fostering safe and efficient markets.” It is therefore prioritizing crypto’s utility by investing in foundational infrastructure and platforms such as Base, which is designed to optimize Ethereum’s infrastructure while increasing the network’s speed and accessibility. Notably, Base has significantly reduced transaction fees and increased transaction speed. The company estimates Q2 2024 transaction fees will be in the mid-10s as a percentage of net revenue. COIN remains focused on maintaining a low-cost structure.
Conclusion
COIN’s efforts to accelerate growth in the cryptocurrency market, increase market share in spot trading on consumer and institutional trading platforms, and improve the trading experience, coupled with ongoing innovation and cost control initiatives, make this Zacks Rank #1 (Strong Buy) stock a strong candidate to add to your portfolio.
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