The trend surrounding Coinbase (NASDAQ:COIN) stock has been reflective of the broader sentiments for the cryptocurrency industry.
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After a glorious listing at $430, COIN stock struggled. This also holds true for Bitcoin (BTC-USD) with the cryptocurrency remaining volatile with a downward bias.
The bullish point is that even amidst volatility and regulatory uncertainties, crypto adoption has continued to increase. As of December 2021, there were 295 million crypto holders globally. Adoption is expected to increase at a robust pace through 2022. This is good news for Coinbase from a user growth perspective.
It also seems that COIN stock has bottomed out. After touching lows of $162.20 toward the end of January 2022, the stock is higher by more than 20%. I don’t expect the stock to surge towards new highs anytime soon. However, the worst seems to be over and current levels are good for accumulation.
Let’s talk about the positive catalysts.
Growing Institutional Adoption
Institutional adoption of cryptocurrencies is likely to be a long-term game changer for Coinbase.
With crypto institutional adoption increasing, crypto investment products registered fund inflow of $9.3 billion in 2021. With more regulatory clarity, institutional adoption is expected to accelerate further in 2022.
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Coinbase has already been a beneficiary of wider institutional adoption. For the third quarter, Coinbase reported institutional trading volume of $234 billion. On a year-on-year basis, institutional volumes increased by 767%. For the same period, transactional revenue from institutional clients increased by 409% to $67.7 million.
Clearly, the trend has been positive and is likely to sustain through 2022.
Recently, Coinbase announced that it partnered with One River to provide crypto account for wealth managers. The company already has clients that include Pimco and Marex Solutions.
Another important point to note is that institutional trading volume is largely concentrated towards Bitcoin and Ethereum (ETH-USD). However, Coinbase has started to see institutions increasingly diversify into other crypto assets. This is another factor that’s likely to boost trading volumes in the coming quarters.
For Q3 2020, Bitcoin and Ethereum constituted 72% of the assets on platform. However, in Q3 2021, the top two coins made up for 64% of the assets on the company’s platform. This is an indication of diversification in portfolio by retail and institutional traders.
Coinbase has been aggressive in terms of adding new assets on the platform. For the third quarter, the company added custody support for 19 new assets. This is another factor that will help in boosting trading volumes.
Strong Growth and Robust Cash Flows
Even with the stock remaining depressed, Coinbase has been on a high-growth trajectory. It reported revenue of $1.2 billion in the most recent quarter. On a year-over-year basis, revenue growth was 330%. For the same period, adjusted EBITDA growth was 402% to $618 million.
It’s unlikely that this growth momentum will sustain. However, top-line, EBITDA and cash flow upside is likely to remain healthy in the coming years.
The company’s ability to generate robust cash flows is another bullish factor. For the first nine months of 2021, Coinbase reported operating cash flow of $2.8 billion. Given the cash flow outlook, the company has ample financial flexibility to pursue aggressive growth. Coinbase also reported a cash buffer of $6.4 billion.
In August 2021, Coinbase announced crypto exchange business in Japan. Further, the company has been planning expansion in India, which is among the biggest market in terms of number of crypto users. Given the financial position, Coinbase is likely to pursue aggressive international expansion. This will help the company in delivering strong growth.
In November, Coinbase CEO Brian Armstrong said that the NFT space can be as big or bigger than crypto trading. The company is planning to introduce peer-to-peer NFT (non-fungible token) marketplace. If the NFT market does continue to swell in size, this is another segment that can be a value creator.
With these positive catalysts, COIN stock looks attractive from a medium to long-term investment horizon.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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