Coinbase Missed Earnings, But the Bull Case Is Still Intact, Analyst Says

Transcript

Hi everyone. I'm here with Owen Laauo, executive director at Oppenheimer. Welcome Owen. >> Thanks, Dave. Thank you for having me. >> So, you're one of my go-to guys when it comes to tracking uh the latest developments in Coinbase, and they released earnings yesterday, and I think it's safe to say that maybe expectations were sky-high, but but the market did not react well. So why don't you just explain um walk us through what they reported and why uh investors are are trading down on it today. >> Yeah, exactly. So uh we have been telling people that uh to be cautious going into the print because when we track the volume trading volume and stuff like that we saw a around 40% decline in trading volume on a

sequential basis. First quarter was a good one but second quarter uh we knew that it wasn't that good and when we look at the consensus number which is compiled by uh many other analysts covering this stock we still believe that the expectation was uh pretty high for whatever reason and um so we kind of expect this outcome they came in uh very close to our estimate but way below consensus and that's why the stock react pretty negatively today. I think the stock is still down around 16% today. Um but I don't think there's anything that we call out that raise any red flag

because we knew that after the liberation day there was a huge concern around recession uh in the second quarter. Um so at that point uh when we when we see something like that people tend to be more on the risk off mode and tend to trade less on crypto. That's why trading volume came down. Um but but again it was like an within our expectation. It was just like uh I think the consensus was just way too high. >> Yeah. It's hard sometimes. I guess it's easy to forget because it was a few months ago, even though I guess today's Liberation Day part two perhaps that just how spooked markets were in early April when um when the tariffs were

initially announced and and there were just such large numbers. Um, something else that I know we've been reporting on, I know you covered too. Uh, perhaps some softness in demand was covered up by these massive treasury companies that are raising billions and billions of dollars to buy assets u that have nothing to do with retail enthusiasm. I I know u for myself, we've been tracking Google trends to get a sense of of retail uh retail interest in buying Bitcoin and other assets and it has been soft and I know that was reflected in Coinbase's earnings as well.

>> Yeah, exactly. Sometimes you don't know like how that could impact trading volume, but we do know there are lots of treasury companies being formed in the first half of this year. Um, sometimes it could be good, sometimes it could be bad, but it looks like at least when you see more buying power, you may have hoped that it could support trading volume, but it it turns out it turns out that it did not in the second quarter. You never know because once these treasury companies being formed um they can raise debt, they can raise equities down the road. It can also increase the buying power of this crypto. Um if they use Coinbase to be the C custody or

trading value or execution partner, it could support these trading volume longer term or may not be just Coinbase but also the whole industry with other exchanges as well. So, I think too early to say there are so many uh treasury companies being formed this year. Uh but we'll see how how that plays out. >> Yeah. And I wouldn't be surprised if I mean Coinbase and frankly many other major exchanges were involved in burgering some of these big acquisitions by the treasury companies. But I mean as you know and I'm sure many people listening know uh retail traders are far more profitable um than than institutions which is what this would qualify as. So, uh, if if there is not that carryover into retail like the

excitement we had during the NFT craze, uh, it you're not going to see the same impact on on the bottom line. Um, but that also kind of puts extra focus on what has been a really big focus for for Brian and Alicia and Emily and everyone over there, building out the subscriptions and services business as a counterweight to trading because it's uh I I think the goal is to always keep it above 50% of the total net revenue and to just be able to smooth out um these peaks and valleys that can come from um trading flows. We saw we saw the height in January and Q1. We we saw the nater here. Uh so what but I also know that uh performance in the subscriptions and

services disappointed. So what can you tell us about that? >> Yeah. So first of all I think the company already guided the second quarter subscription revenue to be uh down a little bit from the first quarter. So again I I'm not uh sure this is an actual surprise to the street. It is actually within or maybe even higher than the midpoint of their guidance. But again I I think there may be some disappointment was because you have circle you have the IPO for circle and people have maybe pretty high expectation about the market cap how much revenue coinbase and circle can capture and that's why there may be some high expectation they gain but I would

say given what the management guided in the second quarter compared to what they actually printed it was actually largely in line within expectation. If you look at the third quarter number, if you look at the midpoint, we are actually seeing a modest acceleration around 7% acceleration or increase in subscription and service revenue from the second quarter to the third quarter. So you see that um the goal hasn't changed, the momentum has not changed, which is the higher market cap, maybe high adoption, large adoption of stable coin. So that's why larger market cap and higher revenue

for for Coinbase uh going forward. So I think that narrative still states. >> Okay. So let's talk about um the biggest part of the subscriptions and services, the stable coin revenue. I I think the collective community was pretty shocked when uh Circle released its S1 and realized that perhaps Coinbase was making 10 times as much money from USDC as Circle itself. uh how Genius Act was just signed into law, so we're not able yet to see how that's going to impact the performance or the growth of USDC and and by extension the impact on on Coinbase's revenue, but since that is the biggest part of this

this subset, what are your expectations? What did um Brian or Alicia or or whoever, what did they say about it uh on the earnings call? Yeah, I think the bottom line is they expect that line item or revenue line item contribution to continue to go up going forward because Coinbase is also taking active steps to drive USDC adoption, right? Think about the partnership with Shopify. Think about the partnership with Nodo Clear. Their goal is to drive more usage of USDC and it could be in the e-commerce space in terms of Shopify or the capital market space

meaning can we use USDC to replace cash as collateral going forward. I think Coinbase said we can and that's why you can drive the adoption of USDC right and can we use USDC as a payment alternative to credit card or debit card I think they feel they can and I believe so too it may take time we may need to build more infrastructure right so we don't have it right now I cannot just go to I cannot just go to Starbucks or uh Costco and pay in USDC but you never know in three four five years it could happen so I The goal has been driving the usage of USDC and then in return because Coinbase and Circle has a revenue sharing

agreement which is around 5050% and that's how Coinbase can make money longer term. So the outlook is still pretty strong for for Coinbase uh for this line item. When I look at it, it's really interesting because I see Coinbase and Circle having a a unique opportunity right now to grow and expand the integration of USDC alongside e-commerce and and other traditional um areas of finance before JP Morgan and City and Bank of America and all of them come in. Um they still have sort of an open playing field. That's going to change. And then it's really going to I guess come down to perhaps two factors.

one um how successful they are doing all this and and how much demand there really is for stable coins like USDC in real commerce and not just for trading and then two uh will because USDC is I guess seen as somewhat neutral compared to like a JPM coin or CDBankcoin and whatever I I could imagine some users not wanting to keep track of 10 different stable coins and they might just like USDC because it's neutral it's it's fair for everybody. Uh is that something that they discussed or or do you have any thoughts on that yourself?

>> Yeah, I think they discussed a little bit last night. Uh my thought is it is similar to so-cal I call it private credit uh sorry private label stable coin versus generalpurpose stable coin. The concept is similar to private label credit card versus general purpose credit card. What I mean by private label credit card is it is like if you go to Macy's you have a private label Macy's credit card. you can only use that within the Macy's ecosystem, but you cannot use that Macy's card outside of Macy's. But at the same time, you don't see that Macy's will not accept your general purpose Visa and Mastercard credit card, right? So what I think what would happen is yes JP Morgan City group

they will develop their own stable coin but that's good because once they develop that infrastructure which is I keep emphasizing we don't have it but once they spend money develop that infrastructure it becomes another payment rail so once they have that rail why don't they also accept the point you just make circle or USDC or USDT because they provide neutrality just like general purpose credit part. So to me going forward we will see private label uh stable coin which is JPMcoin or citycoin and then they also they will also accept general purpose stable coins such as USDC or USDT some other um like these kind of stable coins. So that's how I foresee what would happen in the future.

>> Okay. So let let's talk about a few new I guess product rollouts or or or announcements that they've had in in recent days. Uh for one, uh there was a big unveiling of the new base app designed to kind of be like the everything app. Um they're tokenizing stocks now. Uh they've just launched domestic per um I guess to complement their international offering. Um I believe they're also doing um regulated derivatives futures as well. No, they do have >> So maybe just as opposed to asking a question about each one of those, maybe just talk to me about put those together like what was the narrative behind them and how soon might we see uh meaningful revenue u deriving from from any of

that? >> Yeah, I think the company is very excited about the super app, the base app. They have an event I think two weeks ago. They announced that B app. Um, I'm excited too because I don't see a super app just like WeChat in China, right? We don't see a WeChat in the US. I think the ambition is to create that super app that WeChat in the United States. So, I'm excited about this. They are also excited about this. I think they mentioned that they uh have the weight list and that that weight list has 700 800,000 people already register uh in the weight list. So you can tell >> it's not just people trying to farm a base token because I'm not sure one's coming anytime soon.

>> Exactly. So it's coming out uh I don't know pretty soon uh we will monitor that situation. Um but I think this is a a very interesting development in terms of like the monetization right going back to the analyst or investor end go um it will support their trading revenue support their custody revenue and support maybe even USDC because this app would allow people to use USDC as a form of payment. So um again if they it's an ambitious goal but if they can succeed it will be big for for Coinbase. And then the other point you talk about it's the derivative business. It was gigantic in the second quarter. If you look at the international derivative volume, it

actually exceeded $1 trillion notional value in the second quarter. Even though they don't charge a lot of fees on that. So from a revenue contribution standpoint, it wasn't that much, but it's getting larger and larger. They're competing against the largest exchange internationally. So I I do feel like they they have some pretty good initiatives going on that can support the earnings um in the out quarters and out years. >> And how much bigger will that derivatives business be once they close their their $2.9 billion acquisition of Daraba?

>> It will be very big. So um now they have the uh pers uh internationally they're going to launch the pers in the US and they don't but they don't have much option presence if you recall. So durabet one of the key reason why they do it is number one they don't have a strong options trading and the second thing is they can bring the technology to the US and expand in the US uh massively probably next year. So I don't have the number right now because again the financials are not disclosed yet.

We'll get the number in the third quarter. So I can't tell you I cannot quantify at this point but I'll definitely update you guys you know uh in the in in the next quarter when we get the numbers. >> Um what did they say about activity on base? I I I know that that continues to grow. Uh is that meaningfully contributing to revenue yet? >> Uh we have been tracking the base activity. uh it has been doing okay in the second quarter uh versus first quarter from a revenue contribution standpoint. No, it's still not material. May maybe like less than maybe 1% or so to Coinbase revenue. So now this is still a kind of an optionality for us.

Uh but it could be uh getting much bigger maybe in three five years or so. So there's been we've talked about a bunch of actually one more positive and then I want to ask you about one potential uh headwind. Uh the other I guess the other two big announcements that I want to make sure we cover the partnership with JP Morgan and then um the partnership with PNC Bank. Uh obviously those are massive new distribution channels. Um uh JP Morgan in particular to onboard new customers and make it easy to uh deposit funds, send funds and withdraw funds. I used to work at Kraken so I know how much of a pain point that can be for users and for um for the operators. Uh what did they say about those partnerships?

>> Yeah. So um so the JP Morgan one could be the blueprint right for the partnership going forward with other banks. So now they become a back-end white label technology provider to these big banks. So they're not like, oh, trying to push the Coinbase brand um to JP Morgan. JP Morgan still control the user experience, still control the consumer data and also the uh the customer and all the good stuff. But in the back end, Coinbase become the technology provider. So that's the key thing. I think that's one thesis uh we have with Coinbase, which is this is it is not just a trading platform. it can be an infrastructure provider for many

Trevy companies if they can do JP Morgan and PNC um I'm confident that they can do uh the same like similar deal with uh some other banks right so uh going back to what they do um they they mentioned that I think there are around 80 million customers they can access to right now within JP Morgan network and now if you have the JP Morgan credit card you can use that credit card to buy crypto, use that to fund the crypto purchases, which is not allowed in the past, by the way. >> The second one is >> banks don't like it when people borrow to buy crypto. So, a really big step for for for JP Morgan and JP Diamond in particular.

>> Now, become closing. I think close to become a reality that you can use your credit card JP Morgan credit card to buy crypto. I think a long time ago they they either let a lot of um banks let people use credit cards or maybe they just didn't realize that their clients were using their credit cards to buy crypto and I know they put a stop to that because >> Exactly. >> It's it's not like you can't use a Visa card to to go um gamble in a casino, I guess. >> Exactly. Exactly. And the second point I do want to point out is they allow people to redeem the reward like the credit card reward and then transfer to uh USDC or uh through transfer to base and and uh get to USDC. So what that

means is now they make the reward points to be funible to crypto. That could be another key things that I do feel like crypto has the potential to become part of the loyalty program per se. So uh so that that makes this transaction much more seamless between your maybe in the future maybe your airline airline rewards right your AMC rewards now JP Morgan credit card rewards to buy uh to exchange to to USDC and then fi finally the third point is they allow people to seamlessly link the Chase accounts to Coinbase account and then you can buy crypto easily. So those are the key thing that you see they have very tight relationship. Um they're building a very

tight relationship going forward. >> Um just two more quick ones D because I know we're getting close to time. Uh I don't know if it's a coincidence or not but JP Morgan announced a few weeks ago that they were going to try to start charging FinTex for access to customer data through APIs and PNC CEO um basically cheered on Jamie Diamond in making this announcement. Coinbase happened to partner with both. It could be a coincidence, but maybe not. What are your thoughts? >> I don't know. It's hard to speculate. You know, they may have a deal. I don't know for sure. Um, it could be a coincidence. Uh, just like what you said, but I don't have a you know, strong view one way or the other. Um, if you know the banks decided to charge uh

fees for for feeding data to fintech company, you know, they can do it. Um but the bottom line is uh we just need to understand the dynamic and the partnership and whether it will actually hurt the bottom line of this fintech company. But so far I haven't heard anything that that uh the fee would be massive or whether they are actually or Coinbase is actually paying any fee for that. But we'll see. We'll get more information down the road if that's actually happened. >> Yeah, I mean that's actually a much bigger story. It's something that that I'm working on um right now and uh and it's a much bigger story than just crypto. I mean it's it's fintech >> fintech. Exactly. All fintech companies.

Exactly. >> So it's much bigger than just Coinbase, but it affects could potentially affect like a lot of >> and there's a open banking rule as well. Think about that. It should allow you know uh consumer to move the data freely. So there are lots of like things involved in that conversation. >> Yeah. Well, yeah. The idea is I think that the open banking rule the the the CFPB wanted to vacate it and then they decided not to and you know there's going to be like a new rulemaking process and you know exciting stuff. We were worried that that all the DC drama was going to go away with the Clarity Act and uh Genius being signed. Well, we have something new. Um anyway, just just we're kind of at time. I'd like to just get a sense from you like what your expectations are um for the next six

months. uh a big uh a lot of anticipation for a market structure bill be it clarity or or something else. Uh I know especially like the fourth quarter tends to be pretty bullish for crypto. Uh what are your sort of takeaway thoughts? >> Yeah, so uh for the industry and for the company. So for the industry I think there will be more regul regulatory clarity right clarity act could get uh signed into the law hopefully by September and then there will be to me I think that may support uh something I call altcoin summer right because we have clarity on ethereum and bitcoin already but how about kadano sana and doge and all these other uh other tokens we don't know but we may get more

clarity the second one is there may be like more crypto companies they want to go uh public. So you may see some uh more IPOs and and crypto companies trying to raise fund and and things like that. The third one may be consolidation right when you see the kind of the regular regulatory clarity traffic companies may come in when they come in they may also want to buy crypto companies right to support their crypto purchases or infrastructure and also smaller players may also want to consolidate and merge to become bigger to get the scale so so those are the three like key themes I'm looking for for the industry for the stock Coinbase

I do want to address that I know the stock it's down quite a bit today but it it to me it's it's expected uh but the backdrop it's pretty good again improving trading volume improving SNS revenue in the third quarter and also regulatory clarity remember they have not even baked in the durabit number into Coinbase financials and Coinbase has a very strong balance sheet to grow organically and inorganically so the backdrop for earnings growth is actually not bad for for Coinbase So to me it could be a good buying opportunity.

>> Okay. All right. Well, great. Uh I want thanks for joining us. We look forward to having you back. >> Thanks a lot.