Investor Alert

The Ratings Game

Aug. 13, 2022, 11:55 a.m. EDT

Coinbase earnings have Wall Street wondering whether crypto company is too optimistic or misunderstood

By Emily Bary

Coinbase Global Inc. executives remain optimistic about the long-run promise of their cryptocurrency platform, but they admitted Tuesday that current challenges in the crypto market are likely to persist.

After posting a $1.1 billion loss in the latest quarter amid declining volumes and active-user counts, Coinbase (NAS:COIN) projected that volumes and monthly transacting users could fall further in the current quarter.

Additionally, executives said they were “cautiously optimistic” about their ability to “operate within the $500 million adjusted Ebitda loss guardrail” that they had targeted earlier in the year.

Shares of Coinbase were up 1% in morning trading Wednesday.

Despite management being “bullish as ever” on the future of crypto technology, analysts remained largely focused on the near-term challenges in the wake of the latest report.

“The key question going into earnings was whether the company will announce further cuts to bloated expense base to limit losses and cash burn,” Bernstein’s Harshita Rawat wrote. “Management, however, noted that they are ‘cautiously optimistic’ about containing losses to previously guided -$500 adj. Ebitda number. We believe this might well prove to be an optimistic scenario”

Rawat is concerned about “ballooning” stock-based compensation, as well as the company’s cash-burn trends. She noted that Coinbase saw stock-based compensation creep up to 49% of net revenue in the most recent period, while Coinbase also burned through more than $400 million of cash.

“We think the company has sufficient liquidity in the near-to-medium term, particularly since debt maturities are far out (2026-2032),” she added. “However, we now worry more about increasing SBC (as an offset to cash burn) and potential dilution.”

Rawat rates the stock at market perform with a $46 target.

Raymond James analyst Patrick O’Shaughnessy wrote that Coinbase would need to see “much” improvement in its trading volumes in order to get on a path to positive adjusted Ebitda.

“Whether that improvement will take place is very much an open question: while management remains optimistic this is only a temporary ‘crypto winter,’ major cracks in the ecosystem, and reduced confidence in crypto as an inflation hedge call this into question, in our view,” he wrote. “Meanwhile, regulatory scrutiny continues to increase, as do competitive pressures.”

He rates the shares at underperform.

Keefe, Bruyette & Woods analyst Kyle Vogt, meanwhile, downgraded Coinbase’s stock to underperform from market perform following earnings, though he kept his $45 target price.

“COIN’s revenue visibility remains very challenging, especially with retail continuing to disengage with crypto trading and with download activity also trending negatively,” Vogt wrote. “While cash burn will likely be manageable near-term given the company’s large cash balance, investors may be wary of stepping in before seeing evidence of stabilization in some of these significant downtrends.”

He noted that his 2023 net-revenue expectations were 36% below the consensus view.

Others, including D.A. Davidson’s Chris Brendler, took a more upbeat stance.

“The 2Q crypto meltdown weighed heavily on Coinbase’s earnings, but we found 2Q results to be broadly better than our mid-July reset,” Brendler wrote. “With positive variances across multiple key drivers including take rates, non-trading revenues, and expenses, we’re more optimistic on COIN’s profitability.”

He further commented that while Coinbase faces a “murky” near-term landscape, “the recent rally increases our confidence in an eventual recovery once the Fed truly pivots.” Shares have gained 47% over the past month, as the S&P 500 (S&P:SPX) has risen 7%.

Read: Coinbase stock extends its rally. Is the recent spike warranted?

Meanwhile, “COIN is well positioned to withstand the winter and emerge stronger (and leaner) on the other side,” in Brendler’s view.

He rates the shares at buy and upped his price target to $100 from $90.

MoffettNathanson’s Lisa Ellis suggested that Coinbase’s cash-burn trends may be better than they appear, given that “unusual non-operating items” such as tuck-in mergers, cryptocurrency investments, and the repayment of short-term debt factored into performance in the past couple quarters.

“We are forecasting that the total current cash position of the firm ($6.2B cash and cash equivalents hand) will only drop to ~$5 B by the end of 2023, despite our assumption that the current crypto market persists through the next six quarters,” Ellis wrote.

Ellis has an outperform rating and a $200 price target on Coinbase’s stock.

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