Coinbase leaves investors a day behind, dollar short
Investors are often lured into buying hot IPOs of companies with new business models that show signs of hyper-growth. However, when they are made public, it is often difficult to discern if the IPO coincides with the exact moment when growth is at its peak or if the growth is sustainable. Wall Street usually chooses the latter and extrapolates growth into the future.
This was the case with Robinhood (HOOD), which I wrote about in a November article. After the financial services company announced its third quarter results, it seemed clear that its revenue growth would quickly turn sharply negative, meaning it had gone public at a good time to sell the shares rather than sell them. to buy. HOOD then fell 70%.
Now let’s take a look at Coinbase Global (COIN), the cryptocurrency exchange and infrastructure company.
When COIN shares went public last April, earnings and revenue were growing so rapidly that analysts had price targets equivalent to the value of Goldman Sachs (GS). Revenues fell from $190 million in 2020 to $1.8 billion in 2021. Still, it became clear that Coinbase had outperformed last year, with 2022 revenue expected to be down and earnings well. lower than those of 2021.
Ahead of last week’s earnings report, EPS was already expected to fall in 2022 to $7.20, but with further increased spending and lower trading volumes, Wall Street now expects 2022 EPS to be below $4 per share, compared to $14.50 reported in 2021.
In 2021, Coinbase was able to take advantage of market inefficiencies and the cryptocurrency craze. The company has achieved a high turnout on crypto transactions as well as other fees and services. But Coinbase’s take per transaction has fallen significantly from the peak due to increased competition and market efficiency.
Investment firm Needham & Co. commented after the results: “As Coinbase’s transactional revenue is highly sensitive to retailer sentiment, we are particularly concerned that retailer interest in crypto assets could be weaker in 2022 than in 2021 due to declining price momentum in the underlying crypto We are lowering our fiscal year 2022 revenue estimates from $8.38 billion to $6.77 billion dollars given increased headwinds around crypto asset price activity, increasing competition from native crypto exchanges in US markets, and growing uncertainty from rising interest rates and geopolitical concerns and economic growth that could dampen crypto activity.”
Coinbase is the industry leader in all things retail and institutional crypto. However, financial companies dependent on income from transactions stimulated by uncertain market dynamics receive share price multiples that are lower than earnings. Goldman Sachs, for example, is trading with a P/E of 8 on its expected net profit of $15 billion, valuing the company at around $120 billion. In 2022, Coinbase is expected to earn just under $1 billion, up from $3.5 billion in 2021, with a current market cap of around $41 billion.
Coinbase shares are highly correlated to the price of Bitcoin, but I expect the stock to underperform the cryptocurrency this year due to much higher spending. Equity compensation alone is expected to reach $1.5 billion, or nearly 4% of Coinbase’s market capitalization.
Certainly, crypto markets may possibly accelerate significantly this year. Additionally, Coinbase is diversifying its revenue base with new products and will benefit from growth in subscription and service revenue. However, with Coinbase’s EPS expected to fall below $4 this year from $14.50 in 2021, the company appears to have gone public at an optimal time for sellers.
The crypto company impressed Wall Street with massive growth after its IPO, only to buck the trend with significantly declining profits this year. Investors strongly believe that Wall Street will maintain a premium multiple, while risking a significant decline in stocks.
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