Better Bitcoin Stocks: Block vs. Coinbase Global

Bitcoin‘s (BTC -5.52%) The price has rallied around 10% in the past month, seemingly stabilizing above the $20,000 level, as selling pressure across the cryptocurrency market has gradually eased. This stabilization has brought some buyers back into the market’s depressed Bitcoin-related stocks.

Both Block (SQ -3.96%) and Coinbase Global (COIN -4.27%) has risen more than 10% in the past month. Should investors buy either as a turnaround in the Bitcoin market?

Image source: Getty Images.

Neither stock is a pure Bitcoin play

Block’s and Coinbase’s shares often trade in sync with Bitcoin’s volatile prices, but neither company is a pure play on the cryptocurrency.

In the last quarter, Block generated 44% of its revenue from Bitcoin trades on the Cash app. It generated 36% of its revenue from transactions, subscriptions, services and hardware sales from the Square payments ecosystem and another 18% from the Cash app payments and other services.

Block, formerly known as Square, added Bitcoin trading to the Cash app in early 2018. About 10 million Cash App users have bought Bitcoin since then, but it’s been a double-edged sword: Bitcoin brought in significantly more revenue for Block , especially through the cryptocurrency market’s wild expansion through the pandemic, but the margins on Bitcoin sales are much lower than the margins on Square’s merchant-oriented services. Bitcoin’s volatility also outweighs the relative stability of Block’s other platforms.

Coinbase is one of the world’s largest cryptocurrency exchanges. In the last quarter, it generated 41% of its total transaction revenue from Bitcoin. Ethereum accounted for 19% of transaction revenue, while the rest came from other crypto assets.

Coinbase’s business model is entirely tied to the volatile crypto market, and Bitcoin is ironically its most stable category of transactions—since Ether and the smaller cryptocurrencies are typically even more volatile.

Which company is growing faster?

Both Block and Coinbase saw accelerating revenue growth last year as the surge in speculative retail and money available from stimulus checks helped boost the prices of many cryptocurrencies, including Bitcoin, to all-time highs. However, both companies have faced severe declines this year as rising interest rates drive investors away from riskier assets.

Year-over-year revenue growth. Data source: The company’s income reports.

In 2020, Block’s rising Bitcoin revenue offset the pandemic-induced decline in Square’s merchant-oriented services. As the Bitcoin business cooled, the higher-margin merchant-oriented services came in a post-shutdown market and cushioned that blow. That’s why Block’s gross profit actually increased 34% year-over-year in the first quarter of 2022, even though revenue was down 22%.

But over the next few quarters, macro headwinds — particularly inflation and a possible recession — are likely to limit the growth of Square’s merchant ecosystem as Bitcoin’s price stagnates. The recent acquisition of buy now, pay later (BNPL) platform Afterpay, which is deeply unprofitable, will further squeeze the company’s margins. As a result, analysts expect it to post a net loss for the full year.

Coinbase’s growth has been entirely fueled by the buying frenzy in the crypto market over the past two years. Its average monthly transaction users (MTU) more than quadrupled to 11.4 million in 2021, but fell sequentially to 9.2 million in the first quarter of 2022.

The company broadly (and unhelpfully) expects its MTUs to land somewhere between 5 million and 15 million for the full year, but it also recently laid off nearly a fifth of its workforce as CEO Brian Armstrong told investors to prepare for a new “crypto winter”. .” Coinbase turned profitable in 2020 and 2021, but is expected to bleed red ink again in 2022 as the crypto market cools.

The estimates and valuations

Analysts expect Block’s revenue to remain nearly flat at $17.7 billion this year, as it posts a net loss of $681 million, compared with a net profit of $166 million in 2021. In 2023, they expect revenue to grow 20% to $21.3 billion with a smaller net loss of $216 million.

Coinbase’s future looks darker. Analysts expect revenue to fall 50% to $3.9 billion this year before rebounding 32% to $5.2 billion in 2023. They expect it to post a net loss of $2.3 billion this year against a net profit of $3.0 billion in 2021, and for that loss to $626 million in 2023. But I wouldn’t put too much faith in these long-term estimates since they are closely tied to the unpredictable cryptocurrency market.

Based on these expectations, Block and Coinbase are trading at 2x and 3x this year’s sales, respectively. I’m not a fan of either stock right now — and Bitcoin miners might be better “pure plays” on the stabilizing cryptocurrency — but Block is clearly a better choice than Coinbase right now.