Deep value or value trap?
After getting battered by the bear market, shares of Coinbase Global, the world's largest publicly traded crypto exchange, may be in the throes of a tug-of-war between bulls and bears.
The shares have fallen more than 70% so far this year, compared with a 67% decline in the VanEck Digital Transformation ETF and 50% drop in the price of bitcoin (BTC). A combination of the crypto winter, stiff competition and a recent regulatory jolt has contributed to the downturn in the platform that was once regarded as a one-stop shop for all things crypto.
The stock has seen some institutional demand, according to data compiled by Whale Wisdom which tracks quarterly filings that disclose fund managers’ new investments. The data showed that many institutional investors, including Cathie Wood’s Ark Invest, exchange-traded fund issuer Exchange Traded Concepts, Cullinan Associates and Utah-based Refined Wealth Management, collectively bought 2.6 million Coinbase shares in the second quarter.
A few days after that data came out, however, Wood’s Ark Investment Management revealed it had sold more than 1.4 million shares.
While the 1.1 million shares sold by the flagship Ark Innovation fund represented less than 1% of its total investments and the fund still owns almost five million Coinbase shares (according to Ark's holdings data), the sale by Wood's firm nonetheless raises the question of whether now is a good buying opportunity or time to get out.
The bull case
In a bullish scenario, crypto prices would rally and Coinbase would increase its subscription and services products, according to John Todaro, an equity research analyst at investment bank Needham.
Todaro said investors are focused on Coinbase preserving its cash to combat the crypto winter. He added that despite the risks around the stock, he’s in the “bull camp” because of the continued interest from institutions in the crypto sector and the plethora of product use cases by Coinbase. Todaro rates the stock at buy with an $89 price target.
Other bulls acknowledge the volatility in owning Coinbase, but still see the bullish case for investors to gain exposure to the overall crypto ecosystem.
“Investing in Coinbase is not for the faint of heart, as the business – and the stock – will likely see dramatic, potentially protracted swings, because Coinbase’s revenues are currently tightly linked to cryptocurrency asset values, which have historically been cyclical,” Lisa Ellis, an equity analyst at MoffettNathanson, told clients in a note in May when she started coverage of the stock with a buy rating and $200 price target.
“As a stock, we believe Coinbase has enormous scarcity value as a one-of-a-kind, pure expression of the secular cryptocurrency trend,” she said, later adding that Coinbase is “not just any cryptocurrency company – Coinbase is the market leader among Western firms, with deep capabilities in cryptocurrency technology, superior regulatory expertise and a strong brand it can hold its own even among mainstream digital wallets.”
The bear case
In a bear scenario, crypto prices would remain depressed and more “restrictive” regulatory action than expected would continue to soften the demand for crypto, Needham’s Todaro wrote.
In such a scenario, bitcoin would remain below $20,000 for an “extended period on a significant drop in crypto market retail momentum," he said.
“Current crypto asset levels and trading volumes imply further degradation in COIN’s revenue base,” Goldman Sachs analyst Will Nance said in a June note to clients.
Meanwhile, JPMorgan told clients the bank expects Coinbase’s management will be “under pressure to cut costs to drive the firm to profitability.”
Loss of market share has also been an concern amid the sharp decline in crypto prices and increase in global competition. Coinbase’s market share of global trading volume dropped to just 2.9% in July, according to investment bank Mizuho, compared with an average of 5.3% in the first quarter and a peak of 8% to 9% last November.
Absent a near-term crypto price rally, the dust will also need to settle regarding probe by the U.S. Securities and Exchange Commission into Coinbase allegedly listing unregistered securities.
Despite the uncertainties, some analysts are still cautiously optimistic on Coinbase’s prospects. Shares have already priced in a ton of negative news, and the high amount of short interest may prompt a rally as crypto prices turn higher, according to Oppenheimer analyst Owen Lau, who says shares are trading at a “depressed multiple.” He has an outperform rating and a $90 price target.
“COIN's near-term outlook is challenging, but crypto adoption and diversification continue to provide tailwinds longer term,” Lau wrote to clients in a note.
Coinbase declined to comment.
Update (July 29, 19:33 UTC): Updates to include Ark's holdings data.
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