Summary Coinbase Q4 revenues beat heavily reduced expectations. Trading volumes and platform assets continued to drop. For now, shares remain a bet on how cryptocurrencies trade. After the bell on Tuesday, we received fourth quarter 2022 results from cryptocurrency platform Coinbase ( COIN ), which can be seen in this shareholder letter . Shares of the company were whacked last year as the crypto boom popped, sending revenues plunging as compared to prior year periods. While the quarterly report showed some near term progress, the future of the name still remains a bit murky. For Q4, total revenue of nearly $630 million beat street estimates by more than $40 million. However, this figure was down about 75% over Q4 2021 revenues, and it was just 51 weeks ago when the reported quarter's average analyst revenue estimate peaked at more than $2.2 billion. The graphic below shows how segment revenues have progressed over the past year, along with full year totals. Coinbase Q4 Revenue Segments (Company Shareholder Letter) As most investors know, trading volumes have collapsed as cryptocurrencies like Bitcoin (BTC-USD) have seen their prices plunge. Consumer trading volume in Q4 2022 was just $20 billion, as compared to $177 billion a year earlier. Institutional trading volumes were not down as much on a percentage basis, but still fell quite a bit, leading to the lower transaction revenues seen above. Total assets on the Coinbase platform also fell throughout 2022, going from $278 billion to $80 billion. Of that, there was an equal split between the consumer and institutional business at the end of last year. A significant amount of the asset losses were in the first half of 2022, but there was a $21 billion decline in Q4 after a $5 billion sequential rise in Q3. The main reason why Q4 revenues weren't so bad, however, was the major rise in interest income seen above. With interest rates continuing to rise throughout 2022, the company recorded higher interest income on customer fiat balances. However, Coinbase stated that $146 million of interest was also derived from US Coin (USDC-USD) as detailed in the explanation below. USDC Explanation (Q4 Shareholder Letter) While revenues did beat by quite a large margin, the company shifted to major loss territory last year. While beating street estimates by a nickel on a GAAP basis, the $2.46 per share loss equaled more than $557 million in total. That compares to an $840 million profit in the year ago period. Coinbase was able to bring its operating expenses down by about $400 million over Q4 2021 levels, but that obviously wasn't enough when revenues fell by more than $1.86 billion. Management guided to a lower sequential loss in Q1, but we're still talking about a few hundred million in net losses it appears. The company is looking to right size its expense base this year, especially as year over year revenues are still forecast to come down . Analysts don't see profitability on the near term horizon either, but as we've seen in the past, estimates can swing wildly from quarter to quarter. Coinbase still has a fairly healthy balance sheet. The company cited roughly $5.5 billion in USD resources, of which about 80% is cash and equivalents. There was a $148 million sequential decline in USD resources, but that wasn't as bad as a number of prior quarters. The major issue here is ongoing dilution, primarily through stock based compensation, which has sent the Class A (trading class) share count up by roughly 14 million shares in 2021 to nearly 183 million. The elephant in the room for 2023 is regulation. After some notable blowups in the crypto space last year, such as FTX (FTT-USD), we have bodies like the SEC looking to expand their jurisdiction. Obviously, Coinbase and other firms are pushing for fewer restrictions, but they are also just looking for guidance on what is and what is not accepted. Management in the shareholder letter pointed out the European Union's MiCA framework as potentially helping to pave the way for cryptocurrencies to realize their true value. Going into Tuesday's report, Coinbase shares closed a little over $62, which was a little more than $3 above the average price target on the street. The stock bounced around a bit in the after-hours session, finishing down about 1%, but was in the green for a while. Given the Q4 headline beats, we're likely to see analyst estimates come up a little and thus price targets could as well. Of course, let's not forget that just a year ago, the street saw this name worth nearly $350, and look where we are now. Of course, a bet on Coinbase this year is mostly a bet that cryptocurrencies like Bitcoin will do well. If you believe that the Federal Reserve is going to pivot and become less restrictive, and that regulators won't push too hard, we could see a risk-on trade that helps this part of the market. Shares were above $87 earlier this month at their peak, so this is a stock that can rally very quickly, especially since it is highly shorted . On the flip side, a bunch of interest rate hikes, while they would help Coinbase's interest income, could easily send Bitcoin back below $20,000, and that likely sends Coinbase shares lower again. In the end, Coinbase's Q4 report did little to clear up the company's future. While headline results beat, primarily thanks to a surge in interest income, transaction volumes and assets on the platform did take a hit. Things have looked a little better so far in Q1, but the situation can easily turn on a dime. As has been the case since the company went public, a bet on this stock is basically a bet on the crypto space. For now, I'm not in favor of the name until it can get its expense base in order and until we see how much regulators want to crack down on this market segment after the FTX blowup.
