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Are Coinbase shares a ‘buy’ now, after prolonged weakness?

Cryptocurrency play Coinbase’s share price remained in freefall before the exchange unveiled its first-quarter earnings.

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  • Coinbase Global Inc (All Sessions) (Nasdaq: COIN) share price sinks to US$265.10 per share
  • It reported revenue of US$1.8 billion for January to March 2021
  • Downside risks include a plunge in Bitcoin’s price and fee compression, analysts say
  • Buy and sell Coinbase Global stocks with an IG account

Coinbase plunges to one-week low

Shares of Coinbase - which operates the largest US cryptocurrency exchange - fell 6.5% day-on-day to US$265.10 at Thursday’s (13 May 2021) close, before it announced results for the first quarter this year.

That’s down 38% from the newly listed counter’s record of US$429.54 set during its market debut on 14 April 2021, and 30.4% lower than the first-day opening price of US$381.

The sell-off followed rapidly bearish sentiment on Bitcoin, after Tesla Inc CEO Elon Musk’s tweet about the world’s most popular cryptocurrency.

It also came as investors were pouring into ‘extremely speculative’ cryptocurrencies such as Dogecoin and Binance Coin, which Coinbase does not offer, Bloomberg reported.

Among 11 analysts, seven recommended ‘buy’ on COIN shares while four rated ‘hold’ as of Friday. Their average target price was US$427.55, according to Bloomberg data.

Elon Musk’s tweet spooks crypto-linked equities

Coinbase’s shares and other cryptocurrency-linked stocks took a beating from Bitcoin’s price slump this week, triggered by Musk’s comments that Tesla has suspended vehicle purchases using BTC.

The digital token plummeted as much as 15% to a low of US$46,045, after Musk said he was ‘concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions’.

After the tweet, shares of Coinbase tumbled 4.8% in US post-market trading on Wednesday.

Bloomberg Intelligence analysts said the BTC sell-off will pressure Coinbase’s revenue, but the impact should be short-lived.

Coinbase revenue triples from previous quarter

Revenue for 1Q21 totalled US$1.80 billion, about nine times the US$191 million a year ago and tripling from 4Q 2020’s US$585 million. It slightly missed the consensus forecast of US$1.81 billion.

Coinbase said the top-line strength was a result of strong crypto market conditions, amid elevated trading volumes.

Adjusted Ebitda was about US$1.12 billion, surging from US$55 million in 1Q 2020, and largely in line with analysts’ estimates compiled by Bloomberg.

BTIG analysts reiterated ‘buy’ on COIN with a US$500 target, describing the sell-off as ‘vastly overdone’ given excessive emphasis on the ‘unproven, bearish thesis regarding fee compression’.

What might weigh on Coinbase’s performance?

Still, BTIG warned that a sharp drop in the prices of Bitcoin and other tokens might stall Coinbase’s revenue growth.

Increasing competitive pressure from other crypto exchanges or traditional financial services firms entering the space is another downside scenario, BTIG said.

Likewise, Mizuho’s research team remained sceptical about Coinbase’s average revenue per user and margins in the medium term, even though 2Q21 is ‘shaping up to be stellar’.

‘We are most concerned with the heavy reliance on retail trading commissions,’ Mizuho wrote, recommending ‘neutral’ and targeted US$315 on COIN shares.

Over time, the platform’s commissions may face downward pressure from competitors, amid high user sensitivity to transaction fees, Mizuho added.

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