The stock market has tanked since the start of 2022, owing largely to the Fed's decision to raise interest rates to tamp down inflation and a string of detrimental impacts from the war in Ukraine. During times of economic instability, it's not uncommon for investors to liquidate riskier assets in favor of more secure ones like value stocks and fixed-income instruments. And at the summit of speculative investments lies cryptocurrencies.
After surging north of $60,000 toward the end of 2021, the price of Bitcoin (BTC 0.02%) has nosedived 55% year-to-date. The digital coin has settled at $21,615 at the time of this writing. Leading cryptocurrency exchange platform Coinbase Global (COIN -4.65%) has struggled as a result of the crypto sell-off, having shed 77% of its value so far in 2022. But as negative sentiment continues to dominate the industry, is now the time to double down on crypto stocks?
Let's examine Coinbase's situation in more detail to help investors decide whether or not they should buy the stock today.
A wave of headwinds has crushed the crypto exchange
High inflation and the rising interest rate environment have proven to be major challenges for Coinbase up to this point. In mid-June, the crypto exchange slashed more than 1,000 jobs, equal to 18% of its workforce, as the platform's users and revenues continue to slump in response to what CEO Brian Armstrong referred to as a "crypto winter." Although the news was unfortunate, Coinbase's layoffs announcement shouldn't have caught investors completely off guard, since the demand for cryptocurrencies has clearly weakened in the waning economy.
This is very evident in the company's operational performance -- in its opening quarter of 2022, total sales dropped 27.1% year-over-year to $1.16 billion, missing Wall Street estimates by 21%. Its negative $1.98 diluted earnings per share finished nowhere near expectations and represented a steep fall from its $3.05 mark a year ago. Total trading volume also declined 7.8% year-over-year to $309 billion, and the company lost 2.2 million monthly active users from a quarter ago to end at 9.2 million. Transaction revenue, which is how the platform generates the bulk of its sales, contracted 34.2% to $1.01 billion, further highlighting the dramatic shift in crypto demand.
This year, Wall Street analysts forecast Coinbase's total sales to retreat 48% year-over-year to $4.06 billion, and its earnings per share to finish back in the red at negative $7.73. The stock currently trades at just 1.9 times sales as a result of the sell-off, so interested investors may want to consider buying at existing levels. In my opinion, however, Coinbase still faces an unfavorable risk-reward scenario, and I'm not yet convinced of the company's long-term future.
I'll pass on Coinbase for now
I don't feel comfortable recommending Coinbase at the moment. Until we see more regulation concerning cryptocurrencies and wider mainstream adoption, the company is prone to immense volatility. In my view, there are many other great businesses available today at attractive valuations that offer the same, if not more, upside. Prudent investors should stay away from Coinbase stock right now and look to exploit the ongoing correction elsewhere.