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Amid a rocky market for cryptocurrencies, Coinbase Global Inc. may be on track for “further degradation” of its revenue base and under pressure to reduce expenses beyond previously announced job cuts, according to Goldman Sachs.
The company admitted in mid-June that it had taken an overly aggressive stance on hiring and announced that it would be cutting 18% of staff, but Goldman Sachs analyst Will Nance wrote that the move only brings Coinbase’s
COIN,
headcount back to levels seen toward the end of the first quarter.
“We believe COIN will need to make substantial reductions in its cost base in order to stem the resulting cash burn as retail trading activity dries up,” Nance wrote Monday morning, while downgrading Coinbase’s stock to sell from neutral.
Shares are down nearly 5% in premarket trading Monday.
Additionally, he sees a tough situation ahead for Coinbase as the company’s guidance for $420 million in share-based compensation this year is about 42% of Nance’s forecasted revenue for 2022.
“[W]e believe COIN faces a difficult choice between shareholder dilution and significant reductions in effective employee compensation, which could impact talent retention, in our view,” he wrote.
Further, Nance noted that he is “incrementally more bearish on the competitive environment and the outlook for fee rate compression given the announced merging of the Coinbase and Coinbase Pro platforms, which has the potential to reduce the switching costs and make lower pricing more easily available to its users.”
He highlighted that rival crypto broker Binance.US cut fees on bitcoin pairs, a move that he’s not “particularly concerned about” due to Binance.US’s relative size, though he said that the dynamic “reinforces the bear thesis on fee rate compression over time and likely adds to the longer term concerns around pricing.”
He pointed out that Coinbase currently has a roughly $11.5 billion valuation and had a $3.8 billion net-cash position as of the end of the first quarter, though about $1.3 billion of that was in crypto assets, which could see “a significant impairment” given recent trends.
“[W]e believe valuation support is limited as (1) higher revenues in the near term would require higher crypto prices and volatility and (2) we forecast breakeven to negative adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] over the next several years,” he concluded.
Coinbase’s stock has plummeted 75.2% year to date through Friday, while bitcoin
BTCUSD,
has tumbled 54.2% and the S&P 500 index
SPX,
has shed 17.9%.
While Nance has a more negative stance on Coinbase, he’s taking an incrementally positive view on Robinhood Markets Inc.
HOOD,
upgrading the stock to neutral from sell.
“Fundamentals are still very weak for HOOD, in our view, as continued declines in retail trading risk appetite have weighed on active users and margin balances,” he wrote. “However, shares are now trading at an ~$6.5bn market cap versus its cash position of ~$6.2bn and tangible book value of ~$7bn.”
Though Nance expects some pressure stemming from cash burn and net-income burn, he wrote that rising interest rates “are likely to drive a significant acceleration in net interest income over the next several quarters and help reduce HOOD’s losses to a manageable level.”
The stock is up almost 3% in premarket trading Monday.
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