Coinbase: Strong Secular Tailwinds, Strong Regulatory Headwinds

A company that’s been on many investors’ radars in recent months is Coinbase (COIN). Investors in this cryptocurrency exchange have rode the crypto wave higher, with most of the gyrations behind Coinbase following that of the overall crypto market.

In a way, Coinbase stock can be viewed as an indirect way to play the upside the crypto sector provides. As investor interest in crypto grows, so do transaction volumes (and therefore fees for Coinbase).

From the beginning of October to November, Coinbase stock surged from approximately $230 per share to more than $350 per share. That’s some pretty decent growth in a very short amount of time.

However, since then, Coinbase stock has been on the decline. Currently, investors can pick up Coinbase for around $230 per share again. Let’s take a look at what investors are digesting with this stock right now.

Currently, I’m bearish on Coinbase stock.

Earnings Not What Investors Expected

A highly-discussed stock, it’s incredible to think that Coinbase is still less than a year old, as far as being a publicly-traded company goes. A company with huge name recognition, investors keen on growth in the crypto space have piled into this leading crypto trading platform for a good reason.

However, Coinbase has only had a few earnings reports under its belt. The company’s most recent earnings report left investors disappointed. Since then, shares have been on a rather steady decline.

In fact, Coinbase’s recent peak preceded the company’s last earnings report. Investors bought into this top crypto exchange with the hopes of seeing some blowout numbers. Instead, weaker-than-expected results spoiled the party for many.

Coinbase reported revenue that missed analyst estimates by a rather wide margin. The crypto trading platform brought in $1.31 billion in revenue, compared to expected revenue of $1.57 billion. That’s a big miss.

This miss was driven by a drop in the number of monthly transacting users. Additionally, the average take rate per transacting user was down.

This means that not only were fewer crypto investors trading on Coinbase, but when they did, they did so at a lower margin than many had predicted.

This is a key issue many investors have had with Coinbase thus far. The crypto trading platform has traditionally charged investors relatively high transaction fees. When investors are making a tremendous amount of money on each purchase, these fees are easy to ignore. However, if the crypto market dips, price-sensitive customers may seek out lower-fee platforms to trade crypto.

The company did state that Coinbase stock should be viewed through the lens of a long-term investor. The company’s quarterly performance is likely to be volatile. Therefore, taking a short-term view of this company’s performance may be ill-advised.

That said, some of the trends that popped up in this quarterly earnings report were disturbing. Investors looking to play the growth of the crypto segment have seemingly sought out other high-growth opportunities. Whether this continues or not remains to be seen. However, this earnings report did not highlight Coinbase’s growth potential as many hoped it would.

Don’t Forget about Regulatory Risks

The crypto sector is young. Accordingly, investors looking to get in on the action may be doing so at a risky point in time from a regulatory perspective. U.S. regulators have increasingly looked to regulate the crypto sector, both from a taxation and operational standpoint.

One of the stories from this past year that has gotten largely lost in the fray was the SEC lawsuit threat tied to Coinbase’s proposed interest-bearing feature for its crypto trading platform named Lend.

This borrowing/lending platform would have enabled users to lend various tokens and earn interest. However, the SEC objected to this offering, claiming this program would be classified as securities lending and subject to more stringent regulations.

As a result, Coinbase dropped this platform to avoid an SEC lawsuit on the matter.

The regulatory environment for crypto, in general, is becoming less-friendly for investors. Those looking at Coinbase, or any other company tied to this sector, should be aware of the risks involved with doing so.

Wall Street’s Take

Turning to Wall Street, Coinbase earns a Strong Buy consensus rating. Out of 15 analyst ratings, there are 13 Buys, one Hold, and one Sell recommendation. 

The average Coinbase price target of $406.79 implies 76% upside potential. Analyst price targets range from a high of $600 per share to a low of $160 per share. 

Bottom Line

Undoubtedly, Coinbase has brought a tremendous amount of innovation to the market. A crypto trading platform with a pleasing user interface, one might argue that Coinbase brought crypto trading to the masses. Such a categorization seems fair.

However, like any company, investors ought to look at the financials and the overall picture of the growth trajectory of a given company before diving in. Right now, that picture doesn’t look as rosy as it did during the company’s initial offering.

Whether that changes or not from here remains to be seen. However, one thing is for certain — this will be a fun stock to watch in 2022.

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Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.