The Briefing
By Martin PeersSUPPORTED BY AT-BAY
Greetings!
When it comes to profit goals, Brian Armstrong isn’t exactly setting the bar high. Coinbase declared today that it was abandoning the goal it laid out two years ago when it went public to operate “at break even, smoothed out over time,” so that losses sustained during crypto winters would be offset by profits made in good times. Instead, Coinbase said in a shareholder letter accompanying fourth-quarter earnings today that it was “setting our sights on positioning the company to generate adjusted Ebitda in all market conditions.”
Talk about qualified ambitions. Leaving aside the “setting our sights on positioning” verbiage, which makes the time frame hazy, the reliance on “adjusted Ebitda” as the metric makes this promise meaningless. Adjusted Ebitda is one of those metrics companies use when they want to pretend to be profitable by excluding all manner of inconvenient expenses. (See our deep dive here.) In the case of Coinbase, it shrank $557 million of net losses in the fourth quarter to $124 million of losses on an “adjusted Ebitda” basis by excluding a laundry list of expenses. These include stock-based compensation (that’s a biggie) and impairments on investments, as well as a $50 million penalty paid to New York regulators over “shortcomings” in its compliance program.
That issue aside, the change in profit goals is a big shift from how Coinbase sold itself to investors when it initially went public back in 2021. Armstrong’s original statement, made in a founder’s letter contained in Coinbase’s paperwork filed with the SEC, said investors “can expect volatility in our financials, given the price cycles of the cryptocurrency industry.” But he said that Coinbase took a “long-term perspective on crypto adoption” and therefore wasn’t worried about such volatility. This was part of Armstrong’s claim that the company took a “long-term view” and was “looking for long-term investors who believe in our mission and will hold through price cycles.”
So what does the change of stance mean? Armstrong may have realized that he didn’t get those long-term investors, given Coinbase’s 70%-plus stock price drop over the past year or so. He may realize that no matter what he said during the crypto boom, investors only care about profits now. So Coinbase needs to rethink everything. Fair enough. We have no idea when the crypto winter will end. Even Coinbase cautioned investors not to extrapolate forward from the upturn in crypto markets so far this year. “Industry dynamics…remain in flux,” the company said. Armstrong has to operate in that uncertain environment. If only he could aim to make real money and not fake “adjusted Ebitda” profits.
Okta, CrowdStrike, and AvePoint. Those are three stocks—all cybersecurity companies—that look relatively cheap today compared to their peers, we wrote today in our True Value column. And after firewall provider Palo Alto Networks reported upbeat earnings late Tuesday afternoon, you could argue it also deserves a spot on that list.
Even before the earnings report, Palo Alto Networks looked like a bargain. It ended regular trading today with its price at 7.1 times its next 12 months’ revenue, a discount to rival Fortinet, which closed the day trading at 8.5 times, according to Koyfin. Palo Alto Networks stock jumped more than 7% after hours, after the company raised its earnings per share guidance for the current fiscal year, which ends in July. The valuation gap between Palo Alto Networks’ and Fortinet’s stock will narrow slightly if that 7% stock jump is maintained on Wednesday, but Palo Alto Networks’ stock will still likely be cheaper.
And yet its free cash flow margin is higher than Fortinet's and its growth profile is also slightly higher. Palo Alto Networks’ free cash flow margins for the last 12 months were roughly 44%, while Fortinet’s were just 33%. Plus, Palo Alto Networks estimated in its earnings release today that revenue will likely grow at least 25% in its current fiscal year, while analysts expect Fortinet will grow just 22% in 2023, according to S&P Global Market Intelligence.—Akash Pasricha
- The Federal Trade Commission won’t challenge Amazon’s acquisition of One Medical, according to Bloomberg.
- Max Cutler, who led Spotify’s audio talk shows and partnerships and oversaw deals the company made with podcasting giants like Joe Rogan, is leaving the company, according to Bloomberg.
- Walmart said sales growth would slow this year and shoppers are becoming more cautious with their spending on nonessential products.
- Polygon Labs, a group of crypto companies building the Polygon blockchain network, which has one of the 10 largest cryptocurrencies by market cap, laid off 20% of its employees, or roughly 100 people.
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