Summary After taking the investing world by storm, cryptocurrencies have become increasingly risky to buy into. Coinbase's profitability could be affected by regulatory crackdowns and issues in the crypto sphere. The recent drop in crypto prices hasn’t helped their cause. Crypto is in essence a highly volatile market. Introduction – A tentative backdrop makes for a bearish case Coinbase ( COIN ) is touted as America’s leading cryptocurrency exchange. Furthermore, the firm operates globally and therefore enjoys an unparalleled brand recognition in this newfound area. It does not have any headquarters preferring to be web based despite managing over $170 billion. If you are a Coinbase shareholder, congratulations on owning one of the best-performing stocks this year. It has registered a 140% gain year to date. However, this may be the time to consider selling your portion and keeping an eye out for the external conditions that impact crypto if you wish to jump back in. There isn’t much renewed investor interest by what we have gathered. Coinbase’s stock price has declined since it reached a high of $110.15 on July 19, 2023. What is more, the current trading price of $73.43 is far below the opening price of $381 back in 2021. The market cap has dramatically fallen from a closing high of $86 billion to just over $17 billion. The bull run in 2021 where the firm’s revenue surged an impressive 545% to $7.36 billion could just be a one-time occurrence by the looks of things. Everything points to the fact that the frenzy in cryptocurrencies has dissipated. After all, the price of Bitcoin and Ethereum have dropped off considerably making them investments with little to no ROI. Investors are wary of Coinbase given this backdrop and the fact that regulators across the globe have made it difficult for crypto exchanges. Transaction revenues have fallen From making $1.5 billion in transactions in Q1 2021, the crypto exchange has seen this revenue segment decline to $375 million in Q1 2023. Even when looking at percentages, there has been a big drop. From 86% in Q1 of 2021 to 46% of its total revenue in Q1 of this year. There is some positive for shareholders in the form of increased interest in subscription and services. There has been a doubling of revenue from this segment which is totally $362 million as of the first quarter of 2023. However, all is not doom and gloom for the transaction revenue division. It was red hot and drove Coinbase stock price and can make a comeback. Ryan Selkis, co-founder of the crypto market intelligence firm Messari, stated that transaction revenue could re-emerge as a top revenue source for Coinbase in the future. We disagree with Selkis as his premise is based on another wave of enthusiasm and this may not manifest by the current crypto state of affairs. It is the earnings that have us bearish on this stock. Even the federal court decision in late August to launch a spot-based Bitcoin ETF hasn’t rallied the share price. This ruling was seen as a big positive by Wall Street which could potentially bring in billions of dollars of institutional funds into crypto. Despite this analysts have warned to avoid Coinbase. The earnings headwinds now comes in the form of rigid competition from Wall Street funds and brokerages. The SEC being tough on Coinbase has depressed revenues as well. Why not to invest in crypto Personal finance guru Dave Ramsey does not believe in Bitcoin as an investment and terms it funny money. As much as finance experts have pointed out that they do not see any intrinsic value in Bitcoin or crypto in general, it must be said there is no utility in these digital offerings. One cannot pay their electric bill with crypto or buy groceries for that matter. There was a time when digital technology was threatening fiat currencies for their convenience and low cost transactions. But with all the regulatory crackdowns investors best beware of crypto. It appears to be an excellent concept in theory, but the threat of the established fiat currencies still looms. Consequently, now wouldn’t be the right time to buy crypto. On a separate note, a lot has been said about the finite value of Bitcoin. But these are all internet technologies and it takes a computer geek or two to crack the code and totally modify the whole thing . Individual investors should resist the temptation to put money in crypto as it can be addicting. If you do make some money, then you may continue to bet on it which could end badly. This is coming from us who count among us one of our authors who made over a 400 percent gain on Bitcoin in a single year. But we have decided not to keep purchasing and moved away from crypto investments altogether. At least for the time being. 2022 Events and America’s perception of crypto The failure of many renowned crypto trading venues and lending platforms, such as FTX, Celsius Networks, Voyager and Three Arrows Capital, in 2022 (the “2022 Events”) has negatively affected the business environment Coinbase operates in. These 2022 events contribute to a lack of trust in crypto exchanges and may continue to have a bearing on the broader cryptoeconomy. Investors are faced with the very real risk of losing their capital and there is no deposit insurance as such. This makes the whole thing murky. According to a Motley Fool service, Americans are increasingly of the view that cryptocurrency is a bad investment. Nonetheless, more Americans are expected to include this type of speculative investment in their portfolio this year. But the reasons may not be all that pleasing for shareholders. Crypto ownership for making purchases in the metaverse has grown exponentially. Additionally, there are those hobbyists who do it for fun. But even this has dropped off slightly. Some positives – frenzied interest in crypto and a stable current financial picture Bitcoin Google Search Relationship (cointelegraph) Bitcoin and crypto as a whole have seen a lot of interest from investors. So much so that Google trends has illustrated how the price of Bitcoin has been influenced by Google search. The question arises whether the whole thing is just a fad. Since several experts have opined on the dangers of crypto and looking to speculate on it, we will have to conclude that there may not be such drummed up interest going forward. In other words, the crypto frenzy has died down considerably. In more positives, Coinbase Pay is a feature that helps improve customer experience. The objective is to get mainstream users as crypto transactions can often be rather laborious. These sort of facets to the business aim to provide comforts and convenience to the consumer. Incidentally, these make for great value. Additionally, Coinbase CEO Brian Armstrong opines that crypto regulation could serve as a plus for the company. There really isn’t much the company can do in being resilient in the wake of this type of ruling. Technology growth has been a key area and customer loyalty efforts could be stepped up. In this regard, Coinbase Prime is getting a lot of traction from institutional investors in recent weeks. The company did some restructuring this year when it terminated 950 employees in different departments and locations. This was after the 2022 restructuring that saw 1100 staff members being dismissed. Coinbase is bracing for hard times ahead and this leaner approach may give it the chance to survive. For the last quarter, Coinbase had long term debt of $3.334 billion which was a slight decline YOY. Coinbase is not debt-ridden and it paints a sound financial picture. The cash position is just over $5 billion, but the biggest concern is that the company’s future profitability is doubtful, at least by Moody’s assessments . We would like to point out here that the greatest challenges can be a company’s greatest opportunities. If Coinbase can come out these tumultuous circumstances, it would totally change our outlook on the stock. Valuation Crypto is having a hard time at the moment and the figures reflect this. At the moment, earnings and EPS are in negative territory, making P/E based valuation redundant. We tried our hand at a DCF valuation as outlined below. We are pessimistic on the company’s earnings forecasts given the headwinds and we will go with low, sometimes negative revenue growth over the next decade. For the base case, we shrunk revenues by about 49% per year on average. The company started off brilliantly with what could be termed as explosive growth, but has since seen some disappointing declines. For the optimistic case, I went with about 18% average revenue growth, while for the conservative I went with an average of about 74% in declines. In reflecting the earnings over the past three years, I manually put in some figures with declines occurring every other year or so projecting into the future. The website Alphaspread helped with the forecasts in my calculations. We were also inspired by the valuation done by Gytis Zizys . A 25% margin of safety was added to the intrinsic value calculation to give a better idea. Coinbase’s intrinsic value is -$92, implying a 179.8% downside from current valuations. Attempt at a DCF valuation (Morningstar) Author’s own calculations The optimistic case of the valuation is very attractive, but we must keep in mind that growth rates used were on the high side. The reason for the superior growth rates assumed was the initial impetus Coinbase had and the likelihood of coming close to replicating something like that. These valuations could totally change if there is a regulatory curb or some sort of respite. But even if Coinbase is able to get away from litigation, there won’t be a long-term let off in our opinion. Traditional players are well capitalized and the increased competition they might bring could keep Coinbase stock a flash in the pan so to speak. Conclusion – Sometimes it's prudent to follow the crowd The crypto market is unpredictable and the SEC’s endeavor to tighten the screws on Coinbase and the sector itself makes a turnaround rather unlikely. In summary, there are plenty of other growth stocks to invest in. Investors’ risk appetites are alright, but again the perception of crypto as unsafe makes it hard to fathom that a turnaround could occur at this juncture. While blockchain and digital currencies can be a game changer, it is best to steer clear off Coinbase for the foreseeable future. Again, this is a hot stock that has grabbed its fair share of headlines. So watch this space like us and see if anything extremely positive crops up before changing bearish outlooks.
