4 Red Flags for Coinbase Global's Future

Coinbase Global (COIN -0.50%) has burned a lot of investors since its public debut last April. The cryptocurrency exchange offered its shares through a direct listing with a reference price of $250, and it started trading at $381 per share before hitting its all-time high of $429.54 that same day.

But today, Coinbase's stock trades in the $150s. Let's review four red flags that caused investors to rush for the exits, and whether or not that sell-off represents a good buying opportunity for long-term investors.

Image source: Getty Images.

1. There is a slowing in cryptocurrency trades

As one of the world's largest cryptocurrency exchanges, Coinbase's growth is pegged to the market's interest in Bitcoin (BTC -0.88%), Ethereum (ETH -0.34%), Dogecoin (DOGE -0.89%), and other cryptocurrencies.

That interest spiked during the pandemic as retail investors spent more time researching and buying cryptocurrencies online. Stimulus checks also provided additional funds for those purchases. But starting in late 2021, investors started to dump cryptocurrencies as rising interest rates sparked a rotation from riskier assets toward more conservative ones.

Source: YCharts

Those declining cryptocurrency prices caused more investors to shun the volatile market. If we look at Coinbase's growth in monthly transacting users (MTUs) and trading volume, we'll spot a sequential slowdown in the third quarter followed by a sequential recovery in the fourth quarter.

Data source: Coinbase.

However, Coinbase expects both metrics to decline sequentially again in the first quarter of 2022. Raymond James analyst Patrick Shaughnessy also recently warned investors that Coinbase will likely post year-over-year volume declines "for the first time as a public company" in the first quarter of 2022 as it grapples with a "difficult comp" and an "uneven market backdrop."

2. Coinbase is seeing competitive headwinds

As the market's interest in cryptocurrencies wanes, the market is getting saturated with more exchanges. Coinbase now faces direct competition from dedicated exchanges like Binance and Crypto.com, as well as free crypto trading services on Robinhood Markets, Block's Cash App, and other fintech apps.

Coinbase seems to be losing ground to some of those competitors. In a recent note to investors, Mizuho analyst Dan Dolev claimed Coinbase's market share had declined from a peak of 12% last fall to about 8% today. Dolev said the "rapid ascent of competing exchanges like Crypto.com" indicates Coinbase will face "looming retail pricing pressure" and need to quickly ramp up its spending on fresh marketing efforts to stay competitive.

3. Slowing growth and rising investments

Coinbase's revenue surged 136% in 2020 and jumped another 545% to $7.36 billion in 2021. Its net loss in 2019 turned into a net profit of $322 million in 2020, which then skyrocketed 1,025% to $3.62 billion in 2021.

Those growth rates are jaw-dropping, but analysts expect Coinbase's revenue and earnings to decline by 12% and 95%, respectively, in 2022.

Coinbase's earnings will plunge as it expands overseas. Excluding stock-based compensation expenses, it plans to spend $4.25-$5.25 billion this year on its technology, development, and G&A expenses -- more than triple its comparable spending of $1.41 billion in 2021. It expects that elevated spending to persist into 2023.

Coinbase is initially focusing on India, where it plans to hire about 1,000 new employees; and Brazil, where it's nearing a takeover of 2TM, the start-up that owns the country's largest cryptocurrency platform.

Those bold moves could widen its moat, but they'll also throttle its earnings growth as its revenue growth decelerates. That's not an appealing combination in this challenging market for growth stocks.

4. There are new regulations looming for Coinbase

Lastly, Coinbase faces tightening regulations for cryptocurrencies around the globe. In the U.S., the Securities and Exchange Commission (SEC) is expanding the definition of "securities dealer" to set stricter accounting standards for cryptocurrency exchanges.

The European Union recently barred all anonymous crypto transactions, a move that Coinbase CEO Brian Armstrong blasted as "anti-innovation, anti-privacy, and anti-law enforcement," and the U.K. now requires all cryptocurrency exchanges to register for new licenses.

In India, Coinbase recently suspended cryptocurrency purchases through the country's widely used Unified Payments Interface (UPI) as regulators drafted new laws to rein in or ban cryptocurrencies. Meanwhile, Brazilian lawmakers have also been drafting new guidelines for all digital assets. All of these challenges could disrupt Coinbase's costly overseas expansion.

Not enough catalysts on the horizon

Coinbase's stock might seem cheap at five times this year's sales, but there simply aren't enough near-term catalysts to bring back the bulls yet. The sluggish crypto market, tighter regulations, and the company's aggressive spending plans for the next two years will all limit its near-term returns.