Up 143% YTD, Coinbase Stock (NASDAQ:COIN) Could Fall From Here

Coinbase stock (NASDAQ:COIN) has gained 143% year-to-date, reflecting renewed investor trust in the crypto exchange titan. Several factors drive this wave: cryptocurrencies holding strong and promising court rulings, boosted financials due to rising interest rates, and diminished competition following FTX’s bankruptcy. Nevertheless, substantial risks loom, and the stock could fall from here as a result. Therefore, I am bearish on COIN stock.

What’s Fueling Coinbase’s Rally?

Three key factors have propelled Coinbase’s shares since the start of 2023: an improving cryptocurrency landscape, surging interest rates, and waning competition. Let’s discuss these three factors.

1. Recent Court Ruling Spurs Optimism

A recent court ruling has markedly improved the outlook for cryptocurrencies, offering newfound legitimacy and optimism for their future. In late August, a federal appeals court delivered a verdict deeming the Securities and Exchange Commission (SEC) to have wrongfully denied Grayscale Investments’ endeavor to launch a cryptocurrency fund readily tradable on stock exchanges.

This ruling marks a significant turning point in the landscape of digital currencies. In fact, it holds great importance, as it aligns with the enduring dream of cryptocurrency enthusiasts — the establishment of a Bitcoin fund that can seamlessly operate within conventional stock exchanges. The court’s decision marks a substantial stride toward materializing this cherished vision. In turn, cryptocurrencies have held their ground since, with more investors taking them seriously as a legitimate asset class.

2. Rising Rates Boost Coinbase’s Financials

Moreover, investor confidence in Coinbase has seen a notable upswing attributed to the prevailing surge in interest rates. In particular, higher rates have allowed the prospect of enhanced interest income for the company, paving the way for two distinct avenues of growing cash flows.

Firstly, Coinbase actively participates in the USDC (USDC-USD) ecosystem, a digital stablecoin, allowing it to share in the revenue generated from its USDC reserves. Secondly, the company has been able to generate increased interest linked to its customers’ fiat balances.

The positive effects of rising rates were evident in the company’s Q2 results, with Coinbase achieving a staggering 520% year-over-year surge in interest income, soaring to $201.4 million. As long as interest rates remain elevated, Coinbase appears poised to continue reaping the rewards and posting substantial non-transaction-based cash flows.

3. Diminishing Competition

FTX’s bankruptcy created a void within the competitive landscape, one that Coinbase swiftly moved to fill, thereby cementing its dominant position. In addition to the challenges faced by smaller exchanges struggling to navigate the ever-shifting regulatory landscape, investors are increasingly gravitating toward Coinbase.

This preference can be attributed to Coinbase’s being the sole pure cryptocurrency exchange boasting the scale and resources necessary to ensure compliance and investor safeguarding. Of course, Wall Street sees this as a favorable catalyst for the stock, which has certainly contributed to COIN’s prolonged rally year-to-date.

Despite Positive Catalysts, Coinbase Could Fall from Here

Coinbase’s investment case is benefiting from some noteworthy catalysts these days. That said, I believe that the stock could easily give away at least some of its recent gains. This is because the company continues to lose money and dilute shareholders – a trend that doesn’t seem to be coming to an end anytime soon.

Although the firm has enjoyed a boost in revenues due to the resilience of crypto prices, it’s important to note that investor and trader interest in cryptocurrencies is far from the peak levels seen in 2021. This sustained decline in interest has led to a gradual decrease in transaction revenues, significantly impacting Coinbase’s overall financial performance.

For instance, in Q2, total transaction revenues amounted to $327.1 million, marking a 13% decline from the previous quarter and a substantial 50% decrease compared to the same period last year.

Simultaneously, although interest income is on the rise, it still only represented 30% of Coinbase’s net revenues in Q2. This income source is not substantial enough to counterbalance the decreasing revenues resulting from lower transaction volumes. Consequently, Coinbase’s net revenues have continued their downward trend. They fell by 10% year-over-year, reaching $663 million. This decline has led to yet another unprofitable quarter, with net losses totaling $97.4 million.

Then, this question arises: if Coinbase cannot generate profits during a period when sentiment toward cryptocurrencies has at least stabilized, then when can it be expected to do so? This uncertainty poses a significant challenge to the investment case for Coinbase and leaves us with a big question mark.

In the interim, it’s worth noting that COIN’s management has been gradually diluting shareholders through generous stock-based compensation packages. Over the past 12 months, the share count has increased by 5.4%, while Coinbase has incurred losses totaling $1.2 billion during this period. Clearly, this situation is not sustainable. Once investors recognize this reality, Coinbase’s stock may face substantial headwinds.

Is COIN Stock a Buy, According to Analysts?

As far as Wall Street’s view on the stock goes, Coinbase has a Hold consensus rating based on six Buys, nine Holds, and six Sells assigned in the past three months. At $82.74, the average Coinbase stock price target suggests just 1.4% upside potential.

The Takeaway

In summary, although Coinbase’s stock has shown a remarkable year-to-date rally, it’s important to consider some substantial underlying concerns. Despite its current advantage from favorable catalysts, the company grapples with profitability issues, as indicated by declining transaction revenues and continuous losses.

The doubts about its ability to secure profits in a steadying cryptocurrency market cast a shadow over its long-term investment viability. In the meantime, highly-dilutive stock-based compensation packages add to the worries. In light of these challenges, a bearish outlook on COIN stock seems justified, and investors should approach its recent gains with caution.