One of Cathie Wood’s Favorite Stock Has Growth and Value Written All Over It

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Regardless of the sector or industry, top growth stocks all share the same fundamental attributes. Of You’re here To Netflix To Adobe, these companies are able to grow their businesses, retain many competitive advantages and take advantage of paradigm-shifting trends.

After less than a year on public markets, Coinbase (NASDAQ: COIN) is already posting breathtaking growth figures. But rather than getting the kind of premium valuation given to other growth stocks, Coinbase shares have fallen, even though it has higher earnings and net income.

So what gives? Let’s take a look at why Coinbase stock is in trouble and if it’s becoming both a growth stock and a value game.

Image source: Getty Images.

The growth

Coinbase has piqued the interest of well-known growth investor Cathie Wood, CEO of Ark Invest. According to a database called Cathie’s Ark, the investment firm’s suite of funds holds a combined interest of 5.95 million shares of Coinbase, worth $ 1.46 billion at the time of writing. of this article. Representing 3.4% of total assets under management, Coinbase has become one of Ark’s largest holdings.

The investment thesis of Wood and his team is that the adoption of cryptocurrency will increase over the next few decades as more companies hold Bitcoin on their balance sheets. Coinbase’s numbers reflect a trend in both higher assets on the platform (AOP) and ever higher trading volumes. Although Coinbase makes money from both the buy and sell side of a cryptocurrency trade, it will naturally make more money if the prices of cryptocurrencies rise. Inflows tend to correlate with higher cryptocurrency prices, as new investors are drawn to an appreciating asset and existing users benefit from capital gains.

But Coinbase’s second quarter earnings report proved the company could make hay even as cryptocurrency prices plummeted (Bitcoin’s value fell by more than 40% during the period) .

Financial measure

Q2 2021

Q1 2021

Q2 2020

Returned

$ 2.23 billion

$ 1.80 billion

$ 186 million

Net revenue

$ 1.61 billion

$ 771 million

$ 32 million

Trade volume

$ 462 billion

$ 335 billion

$ 28 billion

Assets on the platform

$ 180 billion

$ 223 billion

$ 26 billion

Data source: Coinbase.

Although Q2 PDO declined 19% sequentially (mainly due to falling cryptocurrency prices), a 38% increase in quarter-to-quarter trading volume resulted in a increased income and profits. The year-over-year numbers are even more impressive, as Coinbase’s revenue has increased 12-fold and net profit has increased 50-fold.

Granted, Coinbase received a one-time tax benefit of $ 737.5 million. Its second-quarter adjusted EBITDA was $ 1.15 billion, reflecting a more accurate picture of its profits.

The value

Despite the fact that Coinbase now generates significantly more revenue and net income than in 2020, its twelve-month financial measures (TTM) place the stock in value territory. Its price-to-sell (P / S) ratio is 12, which is high even for most growth stocks, but what separates Coinbase from other growth stocks is its ability to rake in a ton of profits.

Merely dividing Coinbase’s market cap by its TTM net income would give it a price-to-earnings (P / E) ratio of around 20. However, due to stock dilution, Coinbase’s diluted P / E ratio is closer to 23, and its price The ratio to EBITDA is similar. Simply put, the stock is inexpensive, especially once you consider the S&P 500 has a P / E ratio greater than 31.

The risks

Coinbase’s monster growth rate and attractive valuation hasn’t done enough to allay investor fears that the cryptocurrency craze is too unpredictable. The biggest risk Coinbase faces is not regulation or competition from the SEC (although these are real risks) – it’s a slowdown in cryptocurrency trading volumes or a total collapse. of the asset class. Coinbase can post all the gains in the world, but if there is a strong enough conviction that its best days are behind it, then investors will not offer the stock on the upside.

Another risk is that more competitors enter and trivialize the industry. Coinbase’s margins largely depend on its trading fees, which could decline over time as users turn to cheaper options as they have with stock trading. Coinbase has a reputation for high security, user-friendly interface, and excellent tax accounting, but these competitive advantages will only come so far when customers are price-takers willing to trade trading fees. cheaper against an inferior experience.

Is Coinbase a buy?

Investing in Coinbase probably only makes sense if an investor believes in the long-term future of the cryptocurrency. Yet even in this context, there is the threat of increased competition and sinking margins as the cryptocurrency industry matures.

As a leader in a growing space, there is reason to believe that Coinbase can make up for a shortfall by adding more products and services, increasing its AOP, and benefiting from a huge addressable market. All actions have their risks. The good thing about Coinbase is that its risks are quite well known. For investors willing to take them on, Coinbase looks like a great buy given its blistering growth rate and inexpensive valuation.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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