Coinbase (COIN) Picks Up Second 'Buy' Rating Into IPO; an 'Extraordinarily Rare Asset,' Says MoffettNathanson

April 13, 2021 8:36 AM EDT
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Price: $263.70 +2.70%

Rating Summary:
    5 Buy, 3 Hold, 0 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 38 | Down: 18 | New: 7
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Coinbase (NASDAQ: COIN) was initiated with a 'Buy' rating at MoffettNathanson ahead of tomorrow’s direct listing NASDAQ IPO. Analyst Lisa Ellis started the coverage with a positive view on COIN and a price target of $600.00 per share.

Ellis describes Coinbase as “a leading technology infrastructure provider for the cryptocurrency ecosystem,” which is mainly focused on providing retail brokerage services.

“Coinbase has enormous scarcity value as a one-of-a-kind, pure expression of the secular cryptocurrency trend. We are bullish on cryptocurrency technology – while still nascent, we believe it is one of the most disruptive technology innovations in decades, with relevance across a wide range of use cases, including, e.g., as a store of value and/or form of digital currency, for smart contracts and decentralized finance, or for asset identification and tracking,” Ellis said in a note sent to clients today.

Coinbase offers access to over 100 crypto assets across 15 different blockchain platforms. As such, investors are primarily betting on the success of the entire cryptocurrency technology, and not a specific digital asset, like Bitcoin (BTC).

“Coinbase is not just any cryptocurrency company – Coinbase is the market leader among Western firms, with deep capabilities in cryptocurrency technology, superior regulatory expertise, and a strong brand it can hold its own even among mainstream digital wallets. Furthermore, Coinbase’s core business – its retail cryptocurrency trading business – has plenty of growth runway (e.g., can scale another 5-10x before approaching the size of other alternative asset classes like gold, other commodities, and real estate), and is highly profitable (>80% variable margins), generating plenty of cash for investment in long-term growth,” she continues.

However, the analyst is less bullish on the outlook for retail brokerage, the company’s current core business. Coinbase’s performance is directly related to high volatility i.e. the higher level of activity translates into higher revenues. Given that both the trading activity and digital assets valuations are cyclical, Coinbase’s core retail business is facing a number of risks.

“Some investment dollars may shift to ETFs (if/when they are approved by the SEC), crypto assets may see increased regulation (e.g., broader classification as securities), and trading activity may wane as crypto-assets mature, and their volatility decreases. For all of these reasons, we believe it is imperative that Coinbase succeed in diversifying its business into broader crypto technology infrastructure services, and we are closely watching its progress (e.g., the recent acquisition of Bison Trails, a blockchain PaaS company) in doing so,” adds Ellis.

Following the same cyclical logic, a dip in volatility and valuations is likely to yield a decline in 2022 revenues for COIN. Hence, MoffettNathanson analysts don’t expect Coinbase to return to its current level of profitability for several years.

“For example, during the last cycle, the total market cap of cryptocurrencies declined 65% from their peak in late 2017 to their trough in 2018, and declined >35% on a rolling 12-month basis, bottoming out in early 2019. And it is quite likely that we are currently nearing a peak – at $1.8 B, Coinbase’s revenues in 1Q21 were 40% higher than all of 2020 ($1.3 B).”

Taking all pros and cons into the account, the analyst’s view on COIN is more bullish than bearish as we are dealing with an “extraordinarily rare asset.”

“Investing in Coinbase is not for the faint of heart, as the business – and the stock – will likely see dramatic, potentially protracted, swings. We primarily recommend this stock for investors with a multi-year time horizon who have the fortitude to weather ups-and-downs,” the analyst concludes.

Last week, DA Davidson analyst Gil Luria raised the price target on pre-IPO Coin to $440.00 (from $195.00) while maintaining a “Buy” rating. The analyst started coverage with a Buy rating in March, shortly after the IPO filing.

Coinbase is set to make its market debut tomorrow.

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