Stock Analysis & Ideas

Could Coinbase (NASDAQ:COIN) be the Next FTX?

Story Highlights

Following the FTX fiasco, investors have grown nervous regarding Coinbase’s prospects. While the company’s practices paint a much more responsible picture, the stock’s investment case remains utterly speculative.

Following the scandal and bankruptcy surrounding the Bahamas-based cryptocurrency exchange FTX, the whole crypto economy has once again found itself under increased scrutiny. Can crypto holders trust centralized exchanges? If not, is the decentralized model better if there are no regulators and safety valves to protect them? You can easily see why faith in cryptos gaining increased adoption is going down the drain. From “What’s going to be Bitcoin’s (BTC-USD) price next year?” the conversation has shifted to “Which is the next crypto exchange about to crumble?” However, in my view, Coinbase (NASDAQ: COIN) is not the next FTX, and I’ll explain why in this article.

Still, considering that Coinbase is now the second-largest crypto exchange by average liquidity and the largest publicly-traded company in the space, investors have been pondering whether abandoning ship sooner than later may be a wise choice to make today.

Further, management’s lack of attention to shareholder value creation, as proven by the absurd stock-based compensation levels, should keep frustrating the markets. Also, the company’s future prospects are as speculative as they can get. Accordingly, I am neutral on the stock.

Why Coinbase is Not the Next FTX

As soon as crypto holders found out that they couldn’t withdraw their funds from FTX, users and investors of all crypto exchanges grew instantly uneasy. What if this occurs in other exchanges, including Coinbase? Well, despite the several dangers tied to the crypto universe, it appears that Coinbase has taken a significantly more disciplined approach when it comes to handling its users’ funds, driven by high transparency.

What’s the Risk of a “Bank Run?”

To start with, in theory, there can’t be a bank run at Coinbase because, based on its publicly filed, audited financial statements, the exchange holds customer assets at a 1:1 ratio. All its institutional lending activities are at the customer’s discretion and backed by collateral. Thus, the company supports that it has no gating (the practice of temporarily blocking withdrawals) for client loan recalls or withdrawals.

Are There Any Other Liquidity Problems?

Coinbase is very, very liquid. Again, both investors and users here benefit from the fact that the company’s financials are publicly available and heavily audited. The company primarily holds its assets in USD, and it ended Q3 with $5.6 billion in total available USD resources. Of these, $5 billion were actual cash and cash equivalents.

Additionally, being a publicly-traded company, the company can always access new funds through the issuance of additional shares. If something were to go wrong and Coinbase needed extra funds, they could always tap into the capital markets with ease. Would issuing shares for cash destroy shareholder value, especially if it were to be followed by a “bad” event that had already sent the stock lower? Absolutely. Nevertheless, knowing that the company remains truly liquid and has access to further liquidity makes it very trustworthy among its users relative to its private industry peers.

Finally, by utilizing a dedicated risk team, the company has an excellent track record of operating excellence so far. Specifically, the company has never recorded losses from its financing book, has no exposure to client or counterparty insolvencies (excluding $15 million worth of deposits on FTX to enable business operations and client trades, which is pocket money), and has no record of gating for client loan recalls or withdrawals.

High Speculation and Stock-Based Compensation Killing the Stock

Okay, so Coinbase definitely looks solid compliance and liquidity-wise, but is the stock worth buying? What about its future prospects? Well, here’s the thing: nobody knows. Coinbase’s future financials are subject to the wild fluctuations of crypto assets, as well as the engagement of its users with these fluctuating assets. How much money Coinbase will make next year is more speculative than what Bitcoin’s price will be in the future, and the range here is anything from $0 to Cathie Wood’s $1 million by 2030 target. It’s this underlying speculation in all this that is threatening the stock and resulting in such negative hedge fund/investor sentiment.

Also, if there is another factor threatening the stock, that is Coinbase’s stock-based compensation, which is utterly ridiculous. SBC has amounted to $1.4 billion over the past four quarters. Meanwhile, EBITDA over the past four quarters amounts to $100 million. Do you see the problem here? Let’s take last year, for instance, which was a wildly-profitable period for Coinbase, including the company recording $4.53 billion in EBITDA amid record crypto prices and interest in crypto.

Even then, SBC was still close to 1/4 of EBITDA, which is just ludicrous. The company is diluting shareholders way faster than it can create value for them, especially during such a downbeat period in the crypto space.

Is COIN Stock a Buy, According to Analysts?

Turning to Wall Street, Coinbase has a Moderate Buy consensus rating based on nine Buys, seven Holds, and three Sells assigned in the past three months. At $74.59, the average Coinbase stock forecast implies 75.9% upside potential.

The Takeaway 

Coinbase features several qualities that lower its chances of becoming the next FTX. Nevertheless, this has nothing to do with how well the company actually performs financially moving forward, especially during such a highly-distrustful crypto environment. In the meantime, stock-based compensation is rapidly diluting shareholders while uncertainty in the crypto space is growing. Thus, be wary before allocating capital to COIN stock.


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