coindesk.com
Deep value or value trap?
After getting battered by the bear market, shares of the largest publicly traded crypto exchange Coinbase Global (COIN) may be in the throes of a tug-of-war between bulls and bears.
Shares of Coinbase have fallen more than 70% so far this year versus the VanEck Digital Transformation ETF (DAPP), which has dropped 67%, while the price of bitcoin (BTC) has fallen about 50%. A combination of the crypto winter, steep competition and a recent regulatory jolt have contributed to the downturn in the platform once regarded as a one-stop-shop for all things crypto.
Most recently, adding to the potential bull case, the stock saw some institutional demand, according to data compiled by Whale Wisdom which tracks quarterly filings of the form 13F that discloses 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 shares of Coinbase in the second quarter.
However, a few days after the data came out, Wood’s Ark Investment Management disclosed it had sold over 1.4 million shares, making a potential case for the bears.
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 retains close to five million shares of COIN, the sales nonetheless raise the question: is the stock a buy or is it 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 story, he’s in the “bull camp” citing the continued elevated interest from institutions in the crypto sector and the plethora of product use cases by Coinbase. Todaro rates the stock as a buy with an $89 price target.
Other bulls also 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 of MoffettNathanson told clients in a note and initiated coverage with a buy and $200 price target in May.
“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 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.
Some of the bigger Wall Street investment banks have dropped their positive stance towards Coinbase over the last few months, including Goldman Sachs and JPMorgan. The banks are looking for Coinbase to rein in costs and conserve cash.
“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 ongoing concern amidst 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 to an average of 5.3% in the first quarter of 2022 and a peak of 8% to 9% in November 2021.
Absent a near-term crypto price rally, the dust will also need to settle regarding an SEC probe into Coinbase allegedly listing securities.
Despite the uncertainties, some analysts are still cautiously optimistic on Coinbase’s prospects. Shares have already priced in a ton of negative news, while high 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 on shares 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.