Shares of Coinbase Global Inc. were set to extend their slide Tuesday after an analyst at J.P. Morgan abandoned his bullish call in the wake of an “extreme decline” in cryptocurrency prices.
“While we continue to be believers in the cryptocurrency markets and blockchain technology, the extreme decline in the price of cryptocurrency markets in 2Q22 combined with Coinbase’s COIN, -11.41% ramp in investment would appear to not only make it challenging for it to generate a profit in the near future but also to meet its annual loss cap of $500mn of annual EBITDA [earnings before interest, taxes, depreciation, and amortization],” J.P. Morgan’s Kenneth Worthington wrote in a Tuesday note to clients.
He moved to neutral from overweight on Coinbase’s stock, which is off more than 5% in premarket trading after losing more than 11% in Monday’s session. The stock has declined nearly 80% so far this year as crypto prices have dropped and interest in crypto trading has waned.
Crypto prices have been falling over the course of the second quarter, but they’ve come under particular pressure in the past few days, with both bitcoin BTCUSD, -6.07% and ethereum ETHUSD, -6.64% down more than 20% since the start of the weekend. Read more about crypto price plunge.
“Since Coinbase generates the substantial portion of its revenue base on the value of the cryptocurrency token prices (trading, staking, custody) and much of the rest based on sentiment (velocity, earn, borrow), the downturn is likely to have a material negative impact on Coinbase revenue,” Worthington wrote.
He estimates that Coinbase’s volumes have declined more than 30% in the current quarter on the heels of a 40% drop in the March quarter. “Ameritrade data from 1999-2006 suggests a recovery in activity levels could take many years,” he added.
Worthington notes that while Coinbase seems to have frozen hiring in response to tough market conditions, the company may need to do more to cut back its expenses.
“It is easier to grow than shrink, and mgmt./Coinbase risks brand and reputational deterioration either way,” he wrote.
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Further, he sees signs of competitive pressure on the company.
“In this backdrop of a more challenging environment, we note that FTX has overtaken Coinbase in terms of crypto-activity levels in May, and FTX activity has continued to outpace Coinbase in June,” Worthington said in his research note.
He cut his price target to $68 from $171 on Coinbase’s stock but acknowledged “the potential for more downside to the shares should cryptocurrency markets not stabilize and should management not announce more definite steps to reducing the cost base.”