Down 42%, Is It Time to Buy a Discount on This Growth Stock?

Top tier digital assets certainly get a lot of attention from investors. For those who aren’t ready to go all in, owning a business like Coinbase (CURRENCY -2.61%) might be an idea worth considering.

But even this top crypto venture has taken investors on a volatile ride. The company’s shares have soared 391% in 2023, before rising 19% this year (as of Aug. 26). However, they are trading 42% below their 2021 bull market peak.

It’s time to buy a discount on this cryptocurrency growth stock?

Riding the momentum of the crypto market

After crypto winter which started in 2022, Coinbase’s growth has been notable. Net income increased by 50% in the fourth quarter of 2023 due to the increase in digital asset market prices. The momentum continued this year, although transaction fees fell significantly between Q1 and Q2.

Coinbase is a leading brokerage and exchange serving the cryptocurrency industry. Of course, when there is an optimistic sentiment from investors and traders, it increases activity on the platform. The result is a financial win for Coinbase. But the opposite is also true, as a bear market can create a headwind.

The management team, led by founder and CEO Brian Armstrong, is fully aware of this unfavorable trait. That’s why they 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 such as stable currencies, blockchain rewardsand custody fees. Known as subscriptions and services, this segment grew sales by 79% year-over-year in Q2 (ended June 30). It accounted for 43% of total revenue, up dramatically from a 5% share just three years ago. The main objective for Coinbase is to usher in a new era in the industry, one characterized by greater utility of crypto and blockchain, as opposed to financial speculation.

It is not an easy stock to own

At their low point towards the end of 2022, shares traded at a price-to-sell Ratio (P/S) below 1.5. But after the stock’s huge rally, the valuation is less compelling. Today it is going for a P/S multiple of almost 11.9. This is very expensive, in my view, and demonstrates the extreme level of market enthusiasm for the company.

That outlook doesn’t change even if you consider that Coinbase 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 return, but things can turn sour in an instant if market conditions deteriorate, which it probably will, if history is any indication.

Add these highly unpredictable financial results to Coinbase’s steep valuation, and it’s extremely difficult for any investor to buy and hold the stock for the long term. But I can still understand why the business 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 effort too risky.

This is where Coinbase looks compelling. Provides exposure to a company, through stock, that serves the general crypto industry. And to further clarify the connection, the ultimate success of Coinbase depends on the success of the market. If in five or 10 years, crypto and blockchain technology become a bigger part of our daily lives, I’d be shocked if Coinbase doesn’t benefit as well.

Investors who are bullish on the industry and have a high risk tolerance and a longer time horizon are the only ones who should buy this stock.