Shares of popular cryptocurrency exchange platform Coinbase (COIN) have been under more selling pressure. With the broader tech sell-off and renowned short-seller Jim Chanos taking aim at the company, the perfect storm could be in the works as the stock looks to bottom out and regain its footing.
Coinbase stock shed around 58% of its value from peak to trough and is now attempting to move on from its brief plunge just north of $150 per share. Now, it’s never a good idea to be on the receiving end of a short-seller, especially one as famed as Jim Chanos.
Although the shorts may be inclined to talk up their book after there’s already a considerable amount of negative momentum behind it, there are potential pitfalls of catching the falling knife that is Coinbase. I am bearish.
Jim Chanos Refers to Coinbase as a ‘Bubble Stock‘
A few weeks ago, Chanos referred to Coinbase as a “bubble stock.” Indeed, Chanos’ track record speaks for itself. Although Chanos’ alarming statements shouldn’t be taken as gospel, they should cause one to re-evaluate their theses to ensure that the narrative still holds.
In prior pieces, I outlined the high risks involved with a name like Coinbase. Although the firm stood out as one of the more intriguing publicly traded ways to play a bet on the crypto markets, the price-to-earnings (P/E) multiple is so depressed for a reason.
At 13 times trailing earnings, COIN stock seems like more of a bargain to take advantage of amid the tech-driven sell-off. With a trading frenzy in the rear-view mirror, though, it will be tough to stack up against past quarters now that the risk appetite has plunged.
Chanos thinks Coinbase is “overearning” and that increased competition will weigh on the platform’s above-average margins. Just how much fee compression could be in the cards at the hands of rivals? Chanos thinks enough such that the firm “will probably not be profitable this year,”
Indeed, I remarked on Coinbase’s loftier fees relative to competitors in past pieces but thought they were somewhat justified, given Coinbase was a more established and trusted presence in the crypto exchange scene.
Competition Coming?
Relative to the current slate of rivals, I’d argue Coinbase can still justify its loftier fees.
That said, Coinbase’s days of being able to command higher fees may be numbered if a trusted behemoth like PayPal (PYPL) were to make a deeper dive into the crypto waters. Given PayPal’s recent embrace of cryptocurrencies, a case could be made that the crypto brokerages could be headed for the same “race to zero” faced by stock brokerages many years ago.
In any case, I agree with Chanos in that Coinbase’s road ahead doesn’t look half as bright as the road behind it.
Cyclical Nature of Bitcoin
Interest in cryptocurrencies still seems high, given numerous issues at the macro level. The server-breaking popularity of Coinbase’s Super Bowl advertisement was nothing short of remarkable. With Bitcoin and other cryptocurrencies warming up in the latter half of the first quarter, Coinbase stock may have the stage set for a larger relief rally.
However, it is important to note that sentiment in the crypto space can change at the drop of a hat. For that reason, it’s tough to value a company like Coinbase, given how heavily its stock can be influenced by external factors that move the broader basket of cryptocurrencies.
Bitcoin’s boom and bust nature is nothing new. The next bust is inevitable, and it could be just as violent as past downturns that saw crypto exchange commercials vanish for many months at a time. If the broader crypto markets were to go bust, it would be nearly impossible for Coinbase to avoid a plunge of similar magnitude.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, COIN stock comes in as a Moderate Buy. Out of 17 analyst ratings, there are 13 Buy recommendations, two Hold recommendations, and two Sell recommendations.
The average Coinbase price target is $304.94, implying 62.7% upside potential. Analyst price targets range from a low of $135 per share to a high of $500 per share.
Bottom Line on Coinbase Stock
Coinbase is coming off an incredible year, and Chanos may be right in that the company is “overearning.” Indeed, the low P/E multiple may already reflect such. Though Coinbase may face an uphill battle this year, it remains impossible to gauge how the crypto markets will fare this year, given the crisis unfolding in Ukraine.
Further, I wouldn’t discount Coinbase’s ability to resist the fee pressure as rivals loom.
Arguably, it already has. My biggest concern is what happens once big-tech fintech rivals with big crypto ambitions begin to move in.
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