Coinbase could see ‘further downgrade’, Goldman warns in downgrade

Amid a tough cryptocurrency market, Coinbase Global Inc. could be on track for “further degradation” of its revenue base and under pressure to cut spending beyond announced job cuts previously, according to Goldman Sachs.

The company admitted in mid-June that it had taken a overly aggressive approach to hiring and announced it would cut 18% of staff, but Goldman Sachs analyst Will Nance wrote that this move only brings COIN from Coinbase,
the number of employees returned to the levels observed towards the end of the first quarter.

“We believe COIN will need to make substantial reductions in its cost base to stem the resulting cash burn as retail activity dries up,” Nance wrote Monday morning, while downgrading. Coinbase shares to sell them from breakeven.

The shares were down nearly 5% in premarket trading on Monday.

Additionally, he sees a tough spot ahead for Coinbase, as the company’s forecast for $420 million in stock compensation this year represents about 42% of Nance’s projected revenue for 2022.

“[W]We believe COIN faces a tough choice between shareholder dilution and significant reductions in effective employee compensation, which could impact talent retention, in our view,” he wrote.

Additionally, Nance noted that he is “increasingly bearish on the competitive environment and the outlook for fee rate compression given the announced merger of the Coinbase and Coinbase Pro platforms, which has the potential to reduce switching costs and make lower prices more readily available to its users.”

He pointed out that rival crypto broker Binance.US has cut fees on bitcoin pairs, a move he doesn’t “particularly” worry about due to Binance.US’ relative size, although he said that the dynamic “reinforces the bear’s thesis of fee rate compression over time”. and likely adds to longer-term price concerns.

He pointed out that Coinbase currently has a valuation of around $11.5 billion and had a net cash position of $3.8 billion at the end of the first quarter, although around $1.3 billion was in crypto assets, which could see “significant depreciation” given recent trends.

Read: “I thought it was a bad joke” – They gave up other job offers to work for Coinbase and are now unemployed

“[W]We believe valuation support is limited as (1) higher near-term revenue would require higher crypto prices and volatility and (2) we expect to break even at negative Adjusted EBITDA. [earnings before interest, taxes, depreciation, and amortization] over the next few years,” he concluded.

Coinbase stock fell 75.2% year-to-date through Friday, while bitcoin BTCUSD,
fell 54.2% and the S&P 500 SPX index,
lost 17.9%.

While Nance has a more negative stance on Coinbase, he is taking a progressively positive view on Robinhood Markets Inc. HOOD,
upgrade from stock to neutral from sale.

“Fundamentals are still very weak for HOOD, in our view, as the continued decline in retail risk appetite has weighed on active users and margin balances,” he wrote. “However, the shares now trade at a market capitalization of approximately $6.5 billion against a cash position of approximately $6.2 billion and a tangible book value of approximately $7 billion.”

Although Nance expects some pressure from cash consumption and net income consumption, he wrote that rising interest rates “likely to result in a significant acceleration in net interest income at over the next few quarters and help reduce HOOD’s losses to a manageable level”.

The stock is up nearly 3% in premarket trading on Monday.

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