Oppenheimer cuts; Mizuho says a third of revenue could be affected

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Shares of Coinbase Global (NASDAQ: COIN) are down about 11.5% in pre-market Thursday after the cryptocurrency exchange disclosed it received a ‘Wells Notice’ from the U.S. Securities and Exchange Commission (SEC) related to its staking services.

This type of notification is usually sent by regulators to inform companies that certain infractions have been discovered. It is usually a precursor to the SEC ultimately suing the company.

SEC staff “made a “preliminary determination” to recommend that the SEC file an enforcement action against the Company alleging violations of the federal securities laws, including the Securities Exchange Act of 1934,” Coinbase said in a filing.

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet. The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

What analysts are saying?

In response to the Wells Notice from the SEC, Oppenheimer analyst Owen Lau downgraded Coinbase shares to Perform from Outperform, citing an “unhealthy regulatory climate.”

“We raised concerns about the blockchain development in the US after the demise of three banks, and these actions from the authorities have previewed their attitudes toward the industry. While we remain highly supportive of blockchain/digital asset development in the US, under this unhealthy regulatory climate, we are increasingly worried about the fairness of the enforcement actions, and the ability for the ecosystem to grow with seemingly limited and shrinking support from the banking system in the US,” Lau wrote in a note.

The analyst also reminds investors that Coinbase shares are up 118% year-to-date based on yesterday’s close.

Similarly, Barclays analyst Benjamin Budish sees the “heightened potential regulatory risk.”

“We think the most onerous outcome could be that, if various crypto assets are deemed securities, Coinbase would therefore need to register as a securities exchange, in order to keep offering trading in those assets,” Budish said.

Mizuho analyst Dan Dolev said the latest development “could potentially impact up to one-third of COIN’s revenue.” He reiterated an Underperform rating and its $30 per share price target, suggesting a 60%+ downside risk from yesterday’s closing price.

“This is a significant overhang to the stock, in our view. Even if there is no near-term disruption, alt-coins may ultimately require registration, and risk of application denial could significantly weigh on COIN’s ability to generate revenue. For perspective, alt-coins and staking accounted for 30-35% of total revenue in 4Q. While the ultimate impact of the SEC action is still in question, the downside from falling USDC interest income is real, and will likely materially impact 2023 revenue and profits,” Dolev further noted in a memo to clients.

By Senad Karaahmetovic