Is Now The Time To Buy Coinbase (NASDAQ: COIN)?

It’s been death by a thousand cuts for shareholders of crypto exchange Coinbase (NASDAQ: COIN), whose shares went public just over a year ago and have only traded lower since. Was it a sign of things to come, and an indicator that the party was over for high-flying tech companies? Though hindsight is of course 50/50, perhaps it was. Their shares are down a full 83% from the high they hit on the opening day of trading, and have been hitting new lows for several weeks now.

The San Francisco headquartered company released its Q1 earnings yesterday which, to put it kindly, weren’t great. As we’ll see, the numbers are likely going to inspire a fresh round of selling, but this might also put Coinbase shares into an extremely oversold state. For those of us who fancy a bit of risk and are open to long-term holds, it might not be the worst time in the world to start dipping the toe in. Let’s take a look at the case for and against such a move.

Poor Numbers

Anyone getting involved has to at least be aware of the company’s most recent earnings report which was released after the bell rang to end Tuesday’s session. Both revenue and EPS missed analyst expectations, with the former showing year-on-year contraction of 35%, while the latter was much deeper in the red than previously forecasted. To make matters worse, management went out of their way to warn of slowing growth in their forward-looking guidance. 

They told investors they expect both the number of monthly transacting users and total trading volume to decline in Q2 from Q1 levels, largely driven by the slump in crypto prices seen in recent weeks. "In April, we saw continued declines in both crypto asset volatility and crypto prices, which we believe are associated with weakness in financial markets," the company said in its Q1 shareholders letter. "We continue to expect that during a prolonged and stressful scenario for our business, we will aim to manage our 2022 potential adjusted EBITDA losses to approximately $500M on a full-year basis," it added.

It has, for better or worse, always been the case that where crypto goes, so too goes Coinbase. The main reason for this is that crypto is still considered a risky asset, and so will overperform when there’s a risk-on sentiment, and underperform when there’s a risk-off sentiment. We have without a doubt been in a risk-off market for almost all of 2022. In addition, when crypto is trading down, and it tends to do so quite aggressively, the prospects for its world wide application are dimmed. As a result of that, related products and services like crypto exchanges such as Coinbase, become less attractive. It also doesn’t help that Coinbase has struggled to turn a consistent profit, and now with interest rates starting to be raised in the face of soaring inflation, its costs are only going to increase. 

Getting Involved

But all is not lost. While its shares might be getting a spanking right now, there are still some on Wall Street who fancy the risk-reward profile on offer with Coinbase. It was only last week that the team over at Mizuho reasserted their Neutral rating, while lowering their price target from $150 to $135. While investors would always prefer an Outperform or Buy rating, that price target still suggests there’s an upside of close to 90% to be had from where shares closed last night. 

Mizuho believes that among the biggest downside risks is that a crypto-winter has started, which will see the crypto market cap shrink, leading to further pricing compression. However, it pointed out some potential tailwinds that might appear, in the form of bitcoin price appreciation, crypto asset market volatility, and success of new revenue sources such as institutional transaction revenue and subscription and services.

Unless you still believe crypto is a fad that will soon fade away, you have to be thinking that in the long run, exchanges like Coinbase are going to be as necessary as exchanges like the Nasdaq. If you can pinch your nose for a while, now might not be the worst time in the world to start picking up some shares.