Coinbase (NASDAQ: PIECE), a cryptocurrency exchange founded almost nine years ago, went public via a direct listing on April 14. The stock opened at $ 381 per share, well above its benchmark price of $ 250, and closed at $ 328 on day one, which valued the company at nearly $ 86 billion.
However, the stock subsequently fell to the low of $ 290 as Bitcoinof (CRYPTO: BTC) the price has dropped. Its current market cap of $ 58 billion still values the company at 45 times last year’s sales, making it more expensive than many other fintech stocks.
Should investors try their luck on Coinbase, or should they stick to Square (NYSE: SQ), a more diversified fintech player that also allows its users to buy and sell bitcoins?
Coinbase is an all-in bet on cryptocurrencies
Coinbase is the largest cryptocurrency exchange in the United States in terms of transaction volume. Its median trading volume rose 24% to $ 21 billion in 2019, then jumped 81% to $ 38 billion in 2020.
Its platforms allow mainstream users, professional traders and institutional investors to buy and trade a wide range of cryptocurrencies. It also provides an online wallet for storing cryptocurrencies, a Visa debit card for crypto transactions, crypto processing services for merchants, and a digital stablecoin pegged to the US dollar.
Coinbase generates most of its revenue from transaction fees. Its total revenue increased 144% to $ 1.3 billion in 2020. It generated a net profit of $ 322.3 million, compared to a net loss of $ 30.4 million in 2019, while that its Adjusted EBITDA jumped nearly 22 times to $ 527.4 million.
These growth rates coincide with the explosive growth of bitcoin, Ethereum (CRYPTO: ETH), Litecoin (CRYPTO: LTC), and other cryptocurrencies over the past year:
If these prices continue to rise, Coinbase could represent a balanced investment in the larger cryptocurrency market. But if those prices drop, Coinbase will face a sharp slowdown. Competition from other crypto trading apps – including Square’s Cash app, Pay Palof (NASDAQ: PYPL) Venmo and Robinhood – could also impact its ability to raise fees.
Square is a more balanced game on digital payments
Square’s main platform processes mobile, online, and point-of-sale (POS) payments for merchants. It also sells point-of-sale systems that connect businesses to its cloud-based sales departments, which include tools for managing online orders, payroll, analytics, and more.
For consumers, Square offers the Cash app, a peer-to-peer payment app that also offers free bitcoin purchases and stock trades. The Cash app serves over 36 million monthly active users, many of whom use its Visa-branded payment card for debit card purchases.
Square’s revenue jumped 101% to $ 9.5 billion in 2020, even as business closures throughout the pandemic slowed the growth of its businesses in contact with sellers. But the surge in bitcoin sales on the Cash app, which has increased about nine times year over year to $ 4.6 billion, offsetting this slowdown.
Square only generated a gross profit of 2% on its Bitcoin sales, so its adjusted profits only increased by 5% for the year as its low margin Bitcoin income reduced its margins. Its adjusted EBITDA increased 14% to $ 474 million.
Square’s margins are expected to rise again this year as more businesses reopen and reduce its reliance on bitcoin purchases. However, Square still faces increasing competition in the online payments space from PayPal and Europe. Adyen, while PayPal’s recent addition of cryptocurrency purchases to Venmo could help it catch up with Cash.
It’s a simple choice
Coinbase is a diversified way to invest in the cryptocurrency market, but it’s too speculative for my liking. Wall Street thinks Coinbase’s revenue could quadruple this year if cryptocurrency prices continue to rise – but I think making long-term forecasts for cryptocurrencies is a futile effort.
I prefer to stick with Square, which offers some exposure to the cryptocurrency market but generates most of its profits through seller-based services. Analysts still expect Square’s revenue and profits to both grow nearly 50% this year.
Square’s stock isn’t cheap with 129x futures earnings and eight times this year’s sales, but it’s a much safer and more balanced way to profit from the expanding fintech market. than Coinbase.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.