Can Coinbase Stock Rebound? Yes, But It Will Take Time (NASDAQ:COIN) - Seeking Alpha - Financial Daily News Site

Can Coinbase Stock Rebound? Yes, But It Will Take Time (NASDAQ:COIN) – Seeking Alpha

Coinbase Releases Third-Quarter Financial Results

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Elevator Pitch

I rate Coinbase Global, Inc.’s (NASDAQ:COIN) shares as a Hold. My prior article for COIN written on January 25, 2022 discussed “Coinbase’s shift to Non-fungible tokens or NFTs.” I also emphasized in that article that “with cryptocurrency prices on the decline, it becomes even more important for COIN to diversify its revenue base.” Since the start of the year and the publication of my earlier article, Coinbase’s shares have performed badly with the weakness in the cryptocurrency market being a key contributing factor.

Coinbase deserves a Hold investment rating in my view. Although I think that COIN’s shares will eventually rebound as it diversifies its revenue base, it won’t happen anytime soon. Therefore, COIN is rated as a Hold, rather than a Buy.

Why Has Coinbase Stock Dropped?

Year-to-date, Coinbase’s share price has fallen by -72.3% in contrast with a much milder -14.4% correction for the broad market index, S&P 500, during the same period. Between the time when my previous article for Coinbase was published in late-January 2022 and now, COIN’s shares have also dropped by -62.3%, which represents a significant underperformance as compared to the S&P 500’s -7.1% pullback.

COIN’s 2022 Year-to-Date Stock Price Performance

COIN's 2022 Year-to-Date Stock Price Performance

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I believe that Coinbase’s weak 1Q 2022 results and the recent crypto crash are the main reasons for the stock’s poor share price performance in 2022 thus far. I will explore these negative factors for COIN in greater detail in the following two sections of this article.

COIN Stock Key Metrics

COIN announced the company’s Q1 2022 results on May 10, 2022 after trading hours, and Coinbase’s stock price decreased by -26% from $72.99 as of May 10, 2022 to $53.72 as of May 11, 2022. The fact that COIN’s shares lost more than a quarter of their value post-results announcement sends a clear signal that Coinbase’s first-quarter metrics did not meet investors’ expectations.

There are four key metrics for COIN stock that are worth paying attention to.

The first key metric is headline revenue. Based on its Q1 2022 shareholder letter, Coinbase’s top line declined by -35% YoY and -53% QoQ to $1.17 billion in the most recent quarter. Notably, COIN’s Q1 2022 revenue was -21% lower than the market consensus’ topline projection of $1.48 billion.

The second key metric is Monthly Transacting Users or MTUs. Coinbase’s MTUs decreased by -19% QoQ to 9.2 million, and this was -19% below the sell-side’s consensus MTUs forecast of around 10 million according to S&P Capital IQ data.

The third key metric is take rate. The company’s take rate went from 0.46% in the first quarter of 2021 and 0.42% in the final quarter of 2021 to 0.33% in Q1 2022. COIN’s take rate in the recent quarter was negatively affected by an unfavorable mix between retail and institutional trading.

The proportion of retail trading volume as a percentage of total trading volume for Coinbase declined from 36% in Q1 2021 and 32% in Q4 2021 to 24% in the most recent quarter. The take rate for retail trading is much higher than that for institutional trading. As a reference, the Q1 2022 retail take rate for COIN was 1.31% as compared to a 0.02% institutional take rate.

The fourth key metric is EBITDA. COIN’s non-GAAP adjusted EBITDA plunged from $1,205 million for Q4 2021 and $1,117 million for Q1 2021 to $20 million in the first quarter of this fiscal year. More importantly, Coinbase’s actual first-quarter EBITDA came in -96% lower than Wall Street’s expected EBITDA of $448 million as per S&P Capital IQ.

The cryptocurrency market weakness is the major reason for Coinbase’s below-expectations Q1 2022 metrics and this factor could continue to be a drag on COIN’s near-term performance. In the subsequent section, I elaborate more on the impact of the recent crypto crash on COIN.

How Is The Crypto Crash Impacting Coinbase?

Coinbase acknowledged at the company’s Q1 2022 results call on May 10, 2022 that “this might be the first real crypto market slowdown” since the company’s listing in April 2021. COIN also noted at its recent first-quarter earnings briefing that “crypto market cap and volatility both (were) down (in April 2022) compared to Q1.”

As an indication of how severe the current crypto crash is, a recent May 26, 2022 Seeking Alpha News article highlighted that Bitcoin (BTC-USD) has gone below $30,000 and “trades more than 55% below its all-time high in November 2021.”

The crypto crash will most probably translate into lower MTUs and a further reduction in retail trading volume for Coinbase in the short term. This will in turn lead to a decrease in COIN’s key financial metrics, revenue and EBITDA.

As indicated in the preceding section, Coinbase’s key financial and operating metrics in the first quarter of 2022 have already been adversely affected by crypto weakness. Q2 2022 is likely to be an even worse quarter for COIN. According to consensus financial forecasts obtained from S&P Capital IQ, Wall Street analysts see Coinbase’s revenue contracting by -15% QoQ and suffering from an EBITDA loss of -$122 million in the second quarter of this year.

I touch on the outlook for Coinbase stock in the next section.

What Is The Future Of Coinbase Stock?

The near-term outlook for Coinbase isn’t promising. Nevertheless, for investors willing to look past headwinds in the short term, COIN does seem to have a bright long-term future.

In the very near term, Coinbase’s performance is unlikely to impress anyone. In the previous section of the current article, I mentioned about the sell-side analysts’ pessimistic view of COIN’s Q2 2022 performance as evidenced by expectations of a topline decline and EBITDA losses.

COIN’s management guidance for the second quarter of 2022 is aligned with bearish sell-side expectations. Based on its Q1 2022 shareholder letter, Coinbase has guided for lower MTUs and trading volume on a QoQ basis for the current quarter. As noted earlier, the crypto market is still weak, and I don’t see any signs or catalysts for a meaningful recovery in cryptocurrencies at the moment.

On the flip side, I am positive on Coinbase’s long-term future.

On May 4, 2022, Reuters reported that COIN is “opening up its non-fungible token (NFT) marketplace to all users.” Coinbase shared at the company’s recent first-quarter earnings call that “we’ve gotten really positive reaction from customers” with respect to its NFT marketplace, and stressed that this “opens up some really interesting strategic opportunities in the future.” As the recent cryptocurrency market crash suggests, an over-dependence on cryptocurrencies will inevitably lead to substantial volatility in Coinbase’s future top line and bottom line. As such, the NFT marketplace marks a critical milestone in COIN’s revenue and product diversification efforts.

Furthermore, Coinbase has a very strong financial position to take advantage of potential opportunities emerging from the current crypto crash. As of end-March 2022, COIN boasts a significant cash pile of $6.1 billion on the company’s books, which is equivalent to approximately two-fifths of its current market capitalization. This gives COIN the financial strength to either acquire weaker, financially-troubled competitors or invest in new product development.

Is COIN Stock A Buy, Sell, Or Hold?

COIN is a Hold. Coinbase’s shares aren’t expensive considering that cash accounts for around 40% of the company’s market capitalization and its stock price has dropped by over -70% this year thus far. However, COIN’s near-term prospects aren’t favorable, and it will take a while for Coinbase to ramp up its non-crypto products like NFTs and be less dependent on the cryptocurrency market.

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