The cryptocurrency market declined more than 60% in 2022 amid a broader exodus from risky assets, but it rebounded 110% in 2023 as investor sentiment improved, in part because of excitement about the possible launch of spot Bitcoin ETFs. That volatility hit Coinbase Global (COIN 5.68%) particularly hard in both directions. After tumbling 86% in 2022, the stock soared 391% in 2023.
However, Wall Street sees the stock as significantly overbought. Coinbase carries an average analyst 12-month price target of $90 per share, implying a 49% decline from its current price. Should investors interpret that consensus forecast as a sell signal?
Coinbase is the leading cryptocurrency exchange in the U.S.
Coinbase is the largest and most popular U.S. cryptocurrency exchange. Its platform lets retail and institutional investors trade, stake, and store crypto assets. The company also provides wallet services that allow users to interact with decentralized applications (dApps) on various blockchains such as Ethereum and Solana.
Coinbase earns revenue primarily through transaction fees based on crypto price and quantity, and interest on fiat money held in reserve for stablecoin USDC. To that end, its performance is heavily tied to trading volume and prevailing interest rates. A material decline in either metric would be a substantial headwind to revenue growth.
The company has consistently prioritized security and compliance. That strategy has helped it build trust and brand authority with investors, and those qualities give it pricing power. Morningstar analyst Michael Miller wrote the following in a recent note to clients: "The company's reputation, regulatory compliance, and record as a custodian have allowed it to maintain transaction fees above many of its peers."
Coinbase reported reasonably good results in the quarter ended in September. Revenue increased 14% to $674 million, reflecting a 21% decline in transaction revenue offset by a 59% increase in subscription and services revenue, which itself was primarily driven by interest earned on USDC reserves. The company also reported a net loss of $2 million, much improved from the $545 million loss it posted in the previous year, as it continued to focus on expense management.
Coinbase stock trades at a substantial premium
Shares of Coinbase currently trade at 14.5 times sales, a significant premium to the two-year average of 5 times sales. However, whether that valuation is expensive or cheap depends on how fast sales grow in the future, which itself depends on how the cryptocurrency market performs.
The cryptocurrency market has historically been volatile, and recent scandals such as the TerraUSD collapse and the FTX bankruptcy have undoubtedly pushed some investors away. But the collective value of all cryptocurrencies still increased 140% over the past three years, and it could certainly climb higher in the future. The cryptocurrency market is currently valued at about $1.7 trillion, but the global stock market is worth about 62 times more at $106 trillion.
One catalyst that could create upward momentum is the pending approval of a dozen spot Bitcoin ETF applications. Nine of those applications list Coinbase as the custodian, including proposals from BlackRock and Ark Invest. For context, spot Bitcoin ETFs would track the price of Bitcoin, meaning investors could get direct exposure without buying the cryptocurrency itself.
Morningstar expects the cryptocurrency market to reach a market capitalization of $5.8 trillion by 2032, implying compound annual growth of 15% over the next eight years. Coinbase is also expanding geographically, meaning its addressable market is getting larger. With those tailwinds at its back, the company could increase revenue in the mid-teen percentages or faster during the next five-plus years. In that context, its current valuation of 14.5 times sales leans toward the pricey side of reasonable, but it's not outrageous.
Cryptocurrency bulls should think twice before selling Coinbase stock
Coinbase stock has been quite volatile during the past two years, so the forecasted 49% share price decline is well within the realm of possibility. As mentioned, the company is heavily dependent on trading volume and interest rates. That means Coinbase could face headwinds if the Federal Reserve does indeed cut interest rates next year as the market expects.
Investors should also be aware of current litigation. The U.S. Securities and Exchange Commission (SEC) sued Coinbase in June, alleging that it operates an illegal securities exchange and brokerage. The lawsuit categorizes 13 tokens traded on the platform as securities, including Solana and Cardano, meaning they should have been registered as such with the agency.
Coinbase sees the situation differently. It believes the SEC has exceeded its authority by defining securities too broadly, and the company will ask a federal judge to dismiss the case in January. But dismissals have historically been rare at such an early stage, so the litigation will probably last into 2025, according to The Wall Street Journal.
Suffice it to say Coinbase operates in a volatile industry fraught with regulatory uncertainty. But cryptocurrency bulls should still think twice before selling the stock. Coinbase has proved its ability to survive enormous setbacks, and its brand authority should keep it at the forefront of the industry.
If the cryptocurrency market continues to increase in value, few companies, if any, are better positioned to benefit than Coinbase. In that context, the stock could be worth much more in the future, even if it does fall sharply in the near term.
