Coinbase Stock: Don’t Worry Too Much About Crypto Winter

Leon Neal

Thesis

Coinbase Global, Inc. (NASDAQ: CURRENCY) The publication of the second quarter results did not surprise us, even if the media and certain investors were disappointed. The market already knows that Coinbase is going through the crypto winter, and the results will be disappointing for a while.

Moreover, we are increasingly convinced that COIN had already reached its medium-term low in June (which we discussed in our previous article), as the short-term pessimism of the crypto market reached its peak. But the market is looking to the future, and we think long-term crypto investors understand that the current cycle will not sink Coinbase like it has seen over time. Therefore, investors who capitalized on the significant pessimism in June to add more positions were rewarded as COIN had a huge pre-earnings spike (after BlackRock’s announcement).

Bitcoin (BTC-USD) and Ethereum (ETH-USD) also broke off their nadir in June, helping to further boost Coinbase’s buying sentiments. Although we remain cautiously optimistic about its medium-term outlook, we believe that the short-term upside has sufficiently reflected.

Accordingly, we are revising our rating from Speculative Buy to Hold.

Coinbase’s Q2 revenue was bad. But, was the market surprised?

Coinbase Transaction Volume by Customer Segment

Coinbase Transaction Volume by Customer Segment (Company records)

Some analysts, investors, and even the media criticized Coinbase’s Q2 chart as a disappointment as Coinbase’s trading volume suffered from retail and institutional investors withdrawing. The diversion of volume from market makers to competition from offshore exchanges also hit Coinbase, further worsening the decline in trading volume.

As a result, Coinbase’s trading volume fell to $217 billion, impacting both of its customer segments, as noted above. It also represented a 29.8% QoQ drop from FQ1 as the crypto market crashed in June. Additionally, management reported that its retail base (Coinbase’s most crucial customer segment) remained hesitant in July as retail investors were cautious about re-entering the fray, given the winds. current macroeconomic opposites.

We believe that management’s conservative forecasts are reasonable. Retail investors’ positioning in risky assets remained cautious even though our analysis indicates that the equity market bottomed in June. Therefore, it is entirely reasonable to expect investors to mirror their concerns about the crypto market, given the credit/default events we have seen in the crypto space.

Therefore, we think retail investors might avoid adding aggressive exposure to near-term crypto assets until the crypto market has recouped most of its losses. Similar to the end of 2021, the retail hype was more pronounced towards the end of 2021 as crypto assets reached new highs. We believe similar moves are likely to occur in 2022/23 as aggressive buying sentiments among the retail base may not return until we get closer to Bitcoin’s previous all-time highs ($69,000 ). Therefore, we believe it is reasonable to expect an extended winter for Coinbase, given its large transaction revenue exposure to its retail base (94% transaction revenue share). .

Nonetheless, Coinbase pointed out that it could likely meet its $500 billion adjusted EBITDA loss forecast for FY22 if the decline in crypto market capitalization does not worsen in H2’22. . However, the fallout in the crypto credit environment continues to keep management on edge, despite crypto prices improving from their June lows. Management Speak clearly:

Based on the spending initiatives we took in the second quarter, we are cautiously optimistic about our ability to operate in this [$500M] railing. This optimism is conditioned on the fact that the crypto market capitalization does not deteriorate significantly below July 2022 levels and that we do not see any other significant change in the behaviors of our customers. We are looking at the headwinds of still seeing fallout in the crypto credit environment. And so I think we need to see a bit of stabilization there and we would like to have more certainty in the regulatory market, and all of that influences what we expect for the second half.

Coinbase Revenue Change % and Adjusted EBITDA Margins % Consensus Estimates

Coinbase Revenue Change % and Adjusted EBITDA Margins % Consensus Estimates (S&P Cap IQ)

Street’s revised consensus (bullish) suggests that Coinbase earnings would likely continue to come under pressure throughout H2’22 as it weathers the crypto winter. However, the street is also confident in management’s loss guidance, as it estimates a $477 million adjusted EBITDA loss for FY22. Notably, Coinbase’s revenue growth and profitability are expected to recover. from their nadir in year 23.

However, we should caution investors that consensus estimates have generally been made based on management guidance. In addition, our past analysis of COIN has also demonstrated that Coinbase’s inherent revenue volatility (due to its massive retail transaction revenue base) has a marked impact on its revenue visibility.

Consequently, it carries attendant risks to its adjusted EBITDA estimates, resulting in significant earnings volatility. Accordingly, we urge investors to continue to monitor the recovery in retail investor sentiment as a proxy for determining the reliability of revenue and earnings estimates as we expect volatility in the crypto market to continue in the short term. term.

Nonetheless, management is confident that it can continue to gain market share amid the crypto rout that has hit several of its competitors. He is optimistic that his ability to navigate the crypto fallout would cement his leadership and confidence with crypto investors as the market emerges from the crisis. CEO Brian Armstrong emphasized:

This is probably the fourth crypto cycle we are going through. And they always seem a bit scary, especially if people have never walked through them before. But we’ve seen it all before. We have been selected by BlackRock and Meta as partners to develop their crypto offer. This is actually a very big deal for several reasons. BlackRock is the world’s largest institutional asset manager. It took several years of diligence to go through with them and close this deal. I think this really shows that Coinbase is uniquely positioned to be the go-to partner for the biggest companies in the world that want to integrate crypto into their offerings.

Is COIN Stock a buy, sell or hold?

COIN Price Chart (Weekly)

COIN Price Chart (Weekly) (TradingView)

COIN stock hit a remarkable low in June, as we had postulated. It jumped nearly 92% from the buy point in our previous article, knocking out short sellers outright. Even though momentum has waned since its unsustainable surge, we’re not surprised.

However, we believe the short-term upside has already reflected and believe a period of sideways consolidation is expected.

Therefore, we are revising our rating from Speculative Buy to Hold. New investors are advised to wait for a significant retracement before considering adding other positions. Current investors are encouraged to use the recent spike in momentum to reduce exposure and take profit if they add to its June lows.

About William G.

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