Is It Time To Be Concerned About Coinbase?

Coinbase has been making plenty of headlines as of late. It seems like for all of the wrong reasons, Coinbase is the largest and most popular cryptocurrency exchange in the US. Coinbase made a name for itself by being one of the safest exchanges along with its simple interface designed to be user-friendly for beginner cryptocurrency traders and investors. Coinbase became the first crypto firm to enter the prestigious Fortune 500 list in late 2022, with 7.8 billion dollars in revenue. But recently, the firm has been garnering attention for its shortcomings rather than its accomplishments, leading many people to question its true value.

In April of 2021, Coinbase took the digital cryptocurrency industry mainstream when it went public on the New York Stock Exchange. Coinbase shares began trading at $381 a share and quickly rose to nearly $430 before pulling back to close at about $328, giving it an estimated value of $86 billion after its first day of trading. Coinbase’s stock remained relatively healthy until its recent crash in May of this year. It fell to a low of $53.72 on May 11. It appears around that time, Coinbase started receiving a backlash of sorts. Coinbase made headlines with its woeful quarterly earnings report:

The drastic drop in stock prices propelled Cathie Wood of ARK Invest to buy the dip. Cathie is catching a falling knife instead, but Cathie’s own investment performance has many pundits and analysts questioning whether her good run was luck or skill. CNBC financial analyst and TV personality, Jim Cramer, once stated that Cathie Wood has the kiss of death, meaning anything she touches will soon go down or die. If Cramer was accurate, this could be concerning for Coinbase, but this is the least of their worries.

Coinbase made headlines again after the Terra Luna collapse, in which Coinbase publicly admitted that they were unprepared for the retail investor interest after Twitter exposed their lack of security. CEO Brian Armstrong vowed to be better prepared for a black swan event. But Coinbase once again made headlines when it was reported that four of its top officials collectively pocketed more than one billion dollars by selling shares since the cryptocurrency exchange’s public listing last spring, a period in which the company’s shares have declined by some 80% as reported by the Wall Street Journal. Co-founders Brian Armstrong and Fred Ursum, as well as president and chief operating officer Emily Choi and chief product officer Sergey Chatterjee, together netted about 1.2 billion dollars in proceeds from stock sales starting from the day the San Francisco-based company started trading through February of this year according to a Wall Street Journal analysis of regulatory filings.

While this isn’t a completely unexpected action, as some analysts suggest investors expect executives, particularly founders, to sell stock in or after an initial public offering after having their stakes locked up for so long. It does make investors raise an eyebrow when the company’s nose dies by $51 billion, down 80% from its IPO. One investor raising their eyebrows is famed short seller Jim Chanos. Chanos is most famous for predicting the bankruptcy of the energy giant Enron in the early 2000s. The 74-billion Wall Street giant committed large-scale accounting fraud. The scandal led to the imprisonment of CEO Jeffrey Skilling and other high-profile executives. Chanos stated that he believes that the stocks of cryptocurrency exchanges will be under extreme pressure due to declining fee revenue, which is the reason for shorting Coinbase:

‘So, Coinbase was not a call on crypto prices, it was a call on what we thought was a sort of ancillary predatory business model what I mean by that. Well, when you get things like crypto, I mean, to me a lot of the end game of crypto is just simply sucking fees and ripping off retail clients. At the end of the day that’s what crypto is all about in my opinion. And so when crypto, when Coinbase went public, we sort of looked at this thing and couldn’t get our hands around the valuation and set it aside, but as the Nasdaq stocks began to break in November and December, we revisited it in January and February.

What really kind of struck me was how much they were over earning. I mean, this was a company that earned two dollars a share in 2020, which was not a bad year for crypto. They earned $17 or $16 last year, and of course they’re going to lose money this year, but what struck me was that this was the amount of revenue they had relative to the assets that were under their umbrella, and, uh, at one point, it got as high as 4%. Um, it’s now, you know, well below that, but you know, 4% annually on the assets of your clients is just a stunningly large number. Charles Schwab earns a fraction of that, sort of 25 basis points. And in the most recent quarter, uh, Coinbase was still well over 100 basis points, and so basically, even if you believe in crypto and bitcoin, what you’re going to see is more and more fee compression and commission rates that are just going to go down a la Robinhood and whatever. And so the businesses that were feasting on, you know, 300 and 400 basis points of assets, went down to 100 and probably 50 basis points. Coinbase isn’t making any money at 150 basis points, so it’s not growing back up and they’ve told you that. So this is a company that’s probably going to have to cut costs. As we now know, they’re doing, you know, faster than revenues because they’re losing, uh, losing money at a reasonably prodigious rate right now. And so I think that, uh, that’s the real problem with money-losing broker-dealers. If you witness, Robinhood generally trades at one to, uh, one and a half times tangible book value. The tangible book value right now is in the low 20s at Coinbase, and by the end of this year it’ll be in the mid teens, so this is still a stock trading between $60 and $70, and you know, it’s just tremendously overvalued even here.’

Coinbase’s recent decline seems to be more than the crypto bear market. Coinbase is down more than bitcoin, and it looks like it will have a hard time recovering while it changes its revenue structure. What are your thoughts on Coinbase? Do you agree with Chanos that it is short or do you see an opportunity like Cathie Wood?

[This article is a transcription of a video made by Only The SAVVY]

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