Coinbase Stock: No Escape From The Crypto Winter

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Investment Thesis

Coinbase (NASDAQ:COIN) reported a disastrous Q1 card that sent the stock swooning post-earnings. The market has been pricing in a disappointing showing by CEO Brian Armstrong & team as it headed into its Q1 earnings. Notably, COIN stock had already been slashed 80% off its November highs before its earnings release.

However, with yesterday’s card that came in well below the consensus estimates, the stock has continued its downdraft. COIN stock is trading almost 18% below yesterday’s close (May 10) in pre-market as investors parsed its Q1 card.

We had not been optimistic about Coinbase’s thesis since our first article in February (Hold rating). We emphasized that Coinbase’s highly volatile transaction revenue made it challenging to model its revenue and profitability with confidence. Despite its efforts to diversify its revenue base, it’s still too early to impact its valuation meaningfully.

We then revised our rating in March to Buy, seeing a short-term counter-trend opportunity. However, we emphasized a price target of $200 for the short-term opportunity. Accordingly, COIN stock hit our price target before continuing its downward spiral.

Notwithstanding, our price action analysis also suggests that the market makers have been trying to force a capitulation in COIN stock before forming a bottom. Therefore, a speculative opportunity could emerge after a consolidation zone has been created.

As a result, we revise our rating from Buy to Hold. We implore investors to bide their time before adding further exposure to COIN stock.

The Street Couldn’t Model Coinbase’s Highly Volatile Revenue Base Accurately

Coinbase revenue (S&P Capital IQ)

Coinbase’s reliance on transaction revenue from mainly its retail customers made it highly challenging to model its estimates accurately. As a result, we were not surprised that Coinbase’s Q1 metrics came in well below the consensus estimates.

For instance, Coinbase reported revenue of $1.17B, down 35.3% YoY in Q1. However, the consensus estimates had pointed to revenue of $1.49B, down 18%. Therefore, the miss was highly significant. It also validated our previous assumptions that it was too challenging to forecast its near-term revenue confidently.

Coinbase had been selling its “crypto-economy” bullish thesis to its investors and urged COIN stock bagholders to stay invested. Armstrong also took the opportunity to address the crypto winter fear in the markets, as he accentuated (edited):

We also tend to see the down period as a big opportunity because we’re greedy when others are fearful. We tend to be able to acquire great talent during those periods and others pivot, they get distracted, get discouraged. And so we tend to do our best work in a down period. So ironically, I’ve never been more bullish on where we are as a company. And our thesis has been about moving away from just being a trading platform to enabling the entire crypto-economy. It’s really starting to work. The majority of our active users are now doing something other than trading. (Coinbase’s FQ1’22 earnings call)

We don’t buy that thesis. Investors must understand the difference between holding the underlying crypto assets and investing in Coinbase. Coinbase’s revenue and profitability are driven mainly by its retail transaction revenue. And if we can’t accurately model its revenue and profitability, how do investors determine what Coinbase stock should be worth?

The Market Is Pricing In A Loss For FY22

Coinbase MTUs (Company filings)

Coinbase transaction revenue QoQ change % (Company filings)

The growth in monthly transacting users (MTUs) has been trending down since 2021’s massive growth. Therefore, we think the market has been pricing in the underlying weakness in its MTUs trend. Furthermore, the company guided further moderation in its MTUs growth for Q2, as it expects to post lower MTUs than Q1’s 9.2M.

Given the uncertainty of its MTUs moderation, it has also impacted the visibility of its transaction revenue. As a result, we could observe the substantial QoQ volatility swings in its transaction revenue, as seen above. Therefore, we continue to find it challenging to confidently value COIN stock, and Coinbase’s guidance corroborated our thesis.

Is COIN Stock A Buy, Sell, Or Hold?

COIN stock price chart (TradingView)

We revise our rating on COIN stock from Speculative Buy to Hold. Readers who used our previous short-term buy opportunity should have exited the trade as it reached our $200 price target. There’s no reason to hold on to it for the long term.

Notwithstanding, our price action analysis suggests that the market makers could be forcing a capitulation in COIN stock. As a result, we believe that COIN stock could find an opportunity to consolidate before staging a potential short-term rebound subsequently. We urge readers to wait patiently for the consolidation before adding exposure.