JThe cryptocurrency market took off in 2021, nearly tripling in value and closing the year at over $2.2 trillion. Coinbase Global (PIECE OF MONEY), a leading crypto broker, took advantage of the bull market and decided to go public in April last year.
However, the company’s shares have since lost more than 85%. The main reasons for the drop are the decrease in crypto-trading activity and a decline in cryptocurrency prices, which are beyond Coinbase’s control.
Unfortunately, the steady decline in the share price does not present a positive outlook for investors. However, Coinbase could increase its profitability, given its operating flexibility.
Thus, whether Coinbase will weather the current downturn and honor investors remains a burning concern, making COIN a touchy stock for now. Therefore, we are neutral on the COIN stock.
Coinbase’s 5 out of 10 “Neutral” smart score rating also agrees with our sentiment. The stock can go either way.
A shaky start to the year: competition intensifies
Coinbase generates most of its revenue from commissions on retail transactions, implying that the stock has a high correlation with the crypto market. This means that any turmoil in the cryptocurrency market will have a disastrous ripple effect on COIN.
The problem with COIN is not internal. The Fed’s decision to raise interest rates to fight inflation has turned investors away from cryptocurrencies, clouding Coinbase’s outlook, but that doesn’t mean Coinbase is doomed. Instead, it seems like now is not the right time for crypto.
In 2021, when the crypto market was booming, Coinbase saw an annual profit of over $3.6 billion on $7.8 billion in revenue. Both figures outnumbered the previous year’s revenue and net income figures. However, in the first quarter of 2022, Coinbase’s revenue fell by more than 35%.
The company missed analysts’ revenue estimates as it earned about $1.17 billion versus $1.48 billion expected by analysts. Additionally, monthly transaction users (MTU) fell to 9.2 million in Q1 2022 from 11.4 million in Q4 2021.
Moreover, the total trading volume increased from $335 million in the first quarter of 2021 to $309 billion in the last quarter. All of this led Coinbase to report a net loss of $430 million, or a loss per share of $1.98.
However, the crypto bear market is not the only problem. Coinbase has been forced to lower its fees on retail transactions due to the buildup of competition. As a result, the company had to reduce its costs from 4% to 1.5%.
Recently, some of Coinbase’s competitors eliminated fees on crypto transactions to attract more customers to their platform. This factor alone has struck fear into investors as Coinbase could see another drop. So, competition is another headwind that Coinbase has to fight to reap profits.
Coinbase has a long way to go
Coinbase’s Q1 report is unsatisfactory, if not worse. Coinbase wants to move towards a long-term play in the crypto market.
The company’s letter to shareholders stated, “We believe these market conditions are temporary and we remain focused on our long-term growth.” He also mentioned that Coinbase is focused on the next generation of crypto opportunities, so the profits haven’t arrived yet.
Emilie Choi, CEO of Coinbase, pointed out that the decline in the company’s bottom line is due to increased spending which will reward the company in the long run. Coinbase’s general and administrative expenses accounted for more than 52% of sales, compared to 13.1% in the same quarter last year.
According to the company, the purpose of these expenses is to strengthen customer support, compliance and sales support functions. Therefore, the expenses will help the company solidify its relationships with customers and regulators and turn a profit in a few years.
Wall Street’s view on COIN stocks
As far as Wall Street is concerned, COIN stock maintains a moderate buy consensus rating. Out of 21 total analyst ratings, 13 buys, six holds and two sells have been assigned over the past three months.
The average COIN price target is $118.95, implying an upside potential of 121.1%. Analyst price targets range from a low of $42 per share to a high of $290 per share.
Takeout – Watching from the sidelines seems reasonable
Coinbase’s operating loss suggests the company is at rock bottom. Additionally, shrinking crypto trading and immense competition pose significant threats to Coinbase, forcing it to increase its efficiency and flexibility. These headwinds make it difficult to convince investors that Coinbase could be a buy.
However, given the size of the company and the power of the brand, the company can find ways to stay relevant and fight back more vigorously. Coinbase could be a thriving business in a few years, but it’s probably best to wait on the sidelines for now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.