In today's rather welcome bullish rally across most risk assets, Coinbase (COIN -3.97%) is among the top stocks in focus. As of 12:30 p.m. ET, this crypto-focused company has seen its valuation surge 4.2% since yesterday's close.
This move appears to be a bounce back rally, following a rather dismal performance yesterday. Coinbase shares hit their lowest level on record, with the regulated centralized crypto exchange seeing its market capitalization briefly dip below the $10 billion range. That's down dramatically from its peak of more than $76 billion last year.
Two analyst downgrades were partly responsible for Monday's move, which also coincided with a plunge in Coinbase's 2031 bonds, which hit 51 cents on the dollar yesterday. This level implies a yield to maturity of more than 13%, signaling the market believes Coinbase may not make it out of this mess.
Bear market rallies, particularly on low-volume days around the holidays, are commonplace. Thus, it's unclear whether this impressive bounce back rally is a result of the bulls collectively taking yesterday off, or if this stock is finally too cheap to ignore for investors who have been on the fence.
The fallout from the collapse of rival crypto exchange FTX is somewhat of an intriguing potential catalyst for Coinbase. In the near term, most analysts are in agreement that this could lead to a surge in market share and cryptocurrency transaction volume. That said, the two analysts who downgraded Coinbase stock yesterday also noted that any such rally is likely to be short-lived, with downside pressure on transaction volumes continuing into 2023.
Thus, whether investors want to step into the stock at these levels may be more of a question of time horizon than anything. As a near-term trade, there's clearly a case to be made that this stock is poised for some sort of rally off these lows. However, as a longer-term hold, some strong unfavorable secular headwinds could keep the company's valuation pinned at even lower levels from here.
Investors in Coinbase must now face the question of whether this is a sustainable bear market bounce, or if it's just another bottom on the way to lower lows. Personally, my view aligns with most of the analysts on Wall Street right now, who see lower trading volumes and declining transaction fees as the likely trajectory for the sector. For Coinbase stock, it's a tough time to forecast earnings and cash flows, given the uncertainty around these key variables.
Yes, Coinbase has slimmed down its operations and will work toward producing consistent profitability in this difficult market. However, the recent waves of layoffs seen by Coinbase and others in this space may not be enough to combat what could be a sustained bear market for longer than many think is possible.