Coinbase Global (COIN 16.02%), the cryptocurrency exchange platform, had a bumpy ride over the last 12 months. Once worth more than $80 billion in market capitalization, the fintech has lost more than 80% of its value.

To make things worse, the company announced its first-quarter results for 2022 on May 10, 2022, which failed to meet Wall Street expectations. And despite its recent woes, there are good reasons to expect more challenges ahead for the exchange operator.

A Bitcoin.

Image source: Getty Images.

Coinbase’s latest result is ugly

Coinbase has been a beneficiary of the pandemic. As global economies shut down, people who had few options to spend their discretionary cash ended up buying digital assets through Coinbase’s platform.

As customers had to pay Coinbase a fee for every crypto transaction, the fintech generated monstrous growth over the last two years — revenue surged from less than $200 million in the first quarter of 2020 to $2.5 billion in the fourth quarter of 2021. Similarly, net profit increased more than 26-fold from $32 million to $840 million. 

But as Coinbase benefited from an increase in trading activities, it was also penalized when trading volume fell. And that was what happened in the first quarter of 2022. A combination of lower crypto prices and lower volatility has swung its performance the other way. As a result, net revenue fell 27% year over year to $1.2 billion, and net income reversed from $771 million to -$430 million. While revenue fell 27%, operating expenses more than doubled during the quarter, resulting in a net loss.

Coinbase’s near-term prospects remain bleak

The first quarter of 2022 might look ugly, but the second quarter could be awful. According to Coinbase’s April metrics, crypto market capitalization has declined by 18% compared to the end of March, while asset volatility has fallen by 14% as compared to the average of the first quarter of 2022.

In short, the tech company expects lower trading volume (and revenue) in the second quarter (compared to the first). For the full year of 2022, it targets to manage adjusted earnings before interest tax, depreciation, and amortization (EBITDA) of -$500 million. For perspective, EBITDA was $527 million and $4.1 billion in 2020 and 2021, respectively.

In other words, the weak first-quarter performance will likely spill over to the rest of the year. And with the ongoing turbulent external environment — thanks to the decline in stock markets, inflation, the ongoing war in Ukraine, and other factors — it is hard for investors to be optimistic about the company’s prospects.

On a slightly positive note, the tech company is not sitting still hoping for a turnaround in the external environment. It is investing heavily internally to make sure that it can benefit from the eventual turnaround in the crypto price cycle. For example, it hired 1,200 employees, added Cardano to its staking offering, and launched the Coinbase NFT marketplace.

In short, Coinbase is positioning itself to emerge stronger in the long run despite these near-term challenges.

A silver lining for Coinbase

Crypto technology started out as white paper but has reached mainstream lately thanks to the wide adoption of cryptocurrencies — Bitcoin and Ethereum — and other technologies like tokenization and DeFi. As more talents and resources enter this industry, the sky seems to be the limit.

While the long term remains promising, the near term could be bumpy, evident in Coinbase’s latest result. Fortunately, the young company has a fortress balance sheet to weather the near-term volatility. It has $6.1 billion in cash and cash equivalents, giving it plenty of resources to invest in product development and the latest infrastructures to keep its lead in this industry.

Using the guided cash burn rate of $500 million for 2022, it would take more than 10 years for Coinbase to use up its cash hoard. To me, that is a pretty good margin of safety. Still, investors should watch the burn rate closely. Any substantial uptick would be a red flag.

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