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Coinbase stock plunges after a less volatile summer crypto market suppressed fees

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November 10, 2021
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Coinbase Global Inc. plunged 13% from an all-time high Tuesday afternoon, after revealing a summer slowdown in cryptocurrency trading caused a sales slump.

Coinbase revenue fell in the third quarter by more than 40% from the previous three months, as cryptocurrency trading volumes. Coinbase, which offers a signature platform for trading crypto, felt the pain of users not trading to the same levels of previous months.

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“The story of our third quarter really centers around lower volatility that we saw in the quarter,” Chief Financial Officer Alesia Haas said in a conference call Tuesday. “Our monthly transaction users and trading volumes and therefore transaction fee revenue all correlate with volatility. So it’s a very important driver of our financials.”

Coinbase’s
COIN,
+0.98%

financials did not live up to expectations. The company reported third-quarter earnings of $405.3 million, or $1.62 a share, up from $81.3 million in profit in the same quarter a year ago, before the crypto-trading platform went public. Total revenue grew to $1.31 billion from $286.7 million a year ago, but declined sequentially from $2.23 billion in the second quarter, while transaction revenue totaled $1.09 billion, down from $1.93 billion in the second quarter.

Also read: Coinbase CEO anticipates planned NFT marketplace more akin to Instagram than eBay

Analysts on average expected earnings of $1.82 a share on sales of $1.61 billion, with transaction revenue accounting for $1.31 billion, according to FactSet. Coinbase shares dove 13% in the after-hours trading session, after closing with a 1% increase at $357.39, a closing record for the stock.

Analysts largely expected Coinbase revenue to decline from the second quarter, the platform’s first full period as a public company. They tracked a decline in crypto-trading activity in the second quarter, especially July, and Square Inc.
SQ,
-2.53%

seemed to confirm that trend in its earnings report late last week.

See also: Everything you need to know about Coinbase as a public company

“While July was particularly slow, activity levels picked up in August and further in September,” JP Morgan analysts wrote in a preview of the earnings report this week. “Thus far, October has been active for cryptocurrency trading, not unexpected given heavy news flow and token appreciation.”

The analysts, who maintained their overweight rating and modestly increased their price target to $375 from $372 in the note, posited that Coinbase has held up better than the industry overall amid the decline, with volumes dipping about 25% for Coinbase while the larger crypto-trading volumes declined closer to 40%.

Coinbase executives guided for just such a decline in its second-quarter results, predicting three months ago that monthly transacting users, or MTUs, “and total trading volume will be lower in Q3 as compared to Q2.” However, it seemed that a steeper decline in retail transaction revenue compared with retail trading volume — 38% vs. 44% — took a bigger bite out of net revenue than expected.

“3Q saw a dramatic decline in the retail take rate, likely amongst the most dramatic compression in Coinbase’s short history as a public company,” Mizuho analysts wrote after the results hit. “This helped drive the significant (nearly 20%) ‘miss’ in revenue vs. consensus expectations.”

CFO Haas directly addressed these questions in Tuesday’s conference call.

“We want to be clear — There was no change to our retail transaction fee rates in the quarter,” she said. “The decline that you see is the result of math. It is a result of the facts that in low volatility periods, we see our low dollar volume traders become less active. We’ve seen this transaction reversed in October.”

In Tuesday’s forecast, Coinbase executives said that October’s numbers were much higher than what they reported for the third quarter — 11.7 million MTUs and $186 billion in monthly trading volume — and bluntly said, “We believe that retail MTUs and total trading volume will be higher in Q4 as compared to Q3.”

Coinbase’s annual forecast calls for MTUs of 8 million to 8.5 million, and average annual net transaction revenue per user each month in the high $50s.

For the third quarter, Coinbase reported 7.4 million monthly transacting users, while analysts on average were expecting 6.85 million. Overall trading volume was $327 billion, down from $462 billion in the previous quarter, with bitcoin
BTCUSD,
-1.51%

volume comprising 19% of that total, ethereum
ETHUSD,
-1.72%

comprising 22%, and other crypto assets taking up the other 59%, the largest percentage of volume dedicated to non-bitcoin and -ether offerings Coinbase has reported.

Read: The reasons for crypto’s record rally to $3 trillion, as bitcoin and ether hit new highs

Coinbase shares sold for $381 when they entered the public market through a direct listing in April and topped $400 in that session, but the price has yet to return to those heights. Shares posted all-time closing highs in the past two sessions in a row, however.

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