Summary I am downgrading Coinbase Global's rating from speculative buy to hold due to the current consolidation in the crypto market and disappointing Q2 numbers from the trading platform. The company's second quarter revenues declined Q/Q, indicating weakening trading activity on the platform. Coinbase Global has not been able to post a GAAP profit so far. EPS estimates continue to expect full-year losses in FY 2022 and FY 2023. Coinbase Global did achieve positive adjusted EBITDA in Q2, but poor investor sentiment and regulatory challenges are headwinds for the cryptocurrency's revenue potential. The current broad-scale consolidation in the crypto market is causing me to lower my rating on cryptocurrency trading place Coinbase Global ( COIN ) which has not seen the expected benefits from increased trading activity in the second-quarter. While a favorable ruling about the Ripple cryptocurrency could have helped overall sentiment towards the digital asset sector, both Ethereum (ETH-USD) and Bitcoin ( BTC-USD ), the two largest digital cryptocurrencies in the market, have continued to lose ground lately. Given the weak pricing setup for major cryptocurrencies, regulatory headwinds and the failure of the XRP securities ruling to change investor sentiment for the better, I am down-grading my rating on Coinbase Global from speculative buy to hold. Previous rating In An Anticyclical Bet On The Crypto Market I recommended Coinbase Global ahead of its Q2'23 earnings release due to the expectation that the rise in the price of the two largest cryptocurrencies in Q2'23 could have spurred retail trading on the Coinbase Global platform, resulting in a potential boost to the firm's transaction revenues. Unfortunately, this did not happen to the extent that I expected and given the deterioration in the pricing environment in recent days, I would expect trading activity on the Coinbase Global platform continue to weaken in the third-quarter. Second-quarter disappointment Coinbase Global generated only $327.1M in net revenues in the second-quarter, showing a 50% decline year over year. Both retail and institutional investors saw quarter over quarter declines in trading revenues which was surprising to me since I expected retail traders to jump back on the bandwagon after Ethereum and Bitcoin prices appreciated in the second-quarter. Coinbase Global's net revenues, including subscription and services revenues, declined 18% year over year to $662.5M, indicating that the price moves to the upside of Bitcoin and Ethereum have not sparked a trading frenzy on the cryptocurrency platform. Source: Coinbase Global Q2 Shareholder Letter Road to profitability and new product offers Despite revenue declines, Coinbase Global has managed to achieve positive adjusted EBITDA in two consecutive quarters, indicating that the profitability trend is overall improving. Coinbase Global did report a Q2'23 net loss of $97.4M, but I think the current profitability situation is much better than in FY 2022. This is because Coinbase Global laid off staff and cut expenses in order to deal with the declining transaction volume on its platform. If the cryptocurrency market goes into another bull market, however, I would expect Coinbase Global to be able to translate positive adjusted EBITDA into GAAP profits as well… just like it did in FY 2021. Source: Coinbase Global New products could help the company to attract an entirely new group of customers to its platform: professional traders that deal with futures contracts. Just days ago, Coinbase Global secured approval from the National Futures Association which means the cryptocurrency platform will be the first such company that offers professional traders leveraged and cash-settled crypto futures. The inclusion of futures contracts is also another step in the direction of driving the industry towards broad-scale legitimacy of cryptocurrencies in the marketplace. Ripple Labs court case fails to recharge investor sentiment A federal judge decided in July that cryptocurrency Ripple was "not necessarily a security", thereby countering claims made by the Security and Exchange Commission that cryptocurrency platforms are engaged in the sale of unregistered securities. The ruling led to an initial improvement in investor sentiment, but this didn't last long. Ripple as well as other cryptocurrencies such as Bitcoin, Ethereum, Cardano, Polygon have all seen significant price declines since. Estimates indicate that Coinbase Global will lose money this year and next year I still believe cryptocurrencies have a role to play in the global digital economy and as long as adoption is growing, cryptocurrency marketplaces like Coinbase Global will continue to attract investments from retail and institutional investors alike. Analysts currently project a loss of $1.98 per-share for FY 2023 and a loss of $1.10 per-share for FY 2024, implying an EPS year over year growth rate of 44%. However, EPS projections for volatile cryptocurrency platforms are extremely hard to make and the trajectory of such estimates can change quickly... especially if a new bull market were to emerge. In my last work on Coinbase Global I said I believe the crypto firm could at least achieve half of its 2021 annual EPS ($14.50) during the next bull market in the cryptocurrency market... which I still believe is possible, but it may take a while until investor sentiment towards cryptocurrencies turns positive again. Calculating with $7.25 per-share in annual earnings potential, Coinbase Global would be valued at approximately 10.6X (forward) earnings. I believe COIN could be valued at 13X bull market earnings which would give the marketplace a fair value in a range of ~$94 per-share. While I have a hold rating on COIN right now due to the headwinds discussed here, I am not a buyer at the moment. Data by YCharts Risks with Coinbase Global One obvious commercial risk is that the cryptocurrency trading platform is dependent on overall investor sentiment and rising cryptocurrency prices... both of which are unpredictable. Additionally, Coinbase Global has considerable regulatory risks since cryptocurrencies remain effectively a grey area and the SEC was recently allowed to file an appeal against the ruling that Ripple is not a security, meaning regulatory headwinds for crypto investors are here to stay. Final thoughts Price volatility for the largest digital assets such as Bitcoin and Ethereum have not translated into a significant headwind for Coinbase Global's transaction revenues in the second-quarter... which was a disappointment. Additionally, while Ripple Labs won a major victory against the Securities and Exchange Commission in July, the security regulator is continuing to challenge the essential legitimacy of cryptocurrencies. As such, I would expect pricing pressure and poor investor sentiment to prevail for a while longer. Given that Coinbase Global did not meet my revenue trajectory expectations in the second-quarter and that major digital asset prices have continued to fall lately, especially Bitcoin and Ethereum, I am down-grading my investment recommendation for Coinbase Global from speculative buy to hold!
