Coinbase Global (COIN -7.35%) will be added to the S&P 500 (^GSPC 0.41%) before the stock market opens on Monday, May 19. The stock has rocketed 643% higher since January 2023, but certain Wall Street analysts still anticipate substantial gains in the next year.
Joseph Vafi at Canaccord Genuity and Devin Ryan at Citizens JMP have set Coinbase with target prices of $400 per share. That implies 52% upside from the current share price of $263. Read on to learn more about this cryptocurrency stock.
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Statistics say Coinbase stock will climb 12% during the year post-inclusion in the S&P 500
The S&P 500 is regarded as the best barometer for the overall U.S. stock market. The index tracks 500 large companies that account for 80% of domestic equities by market value. To be eligible for inclusion, companies must meet certain criteria, including GAAP profitability, a minimum market capitalization of $20.5 billion, and a sufficiently liquid stock.
Over the past decade, 177 companies were added to the S&P 500, meaning about one-third of the index was replaced. Those stocks returned an average of 12% during the year following their inclusion. In this situation, Coinbase will join the S&P 500 on May 19, so statistics say the stock will advance 12% over the next year from its closing price on that day.
Investors may wonder why stocks tend to increase after joining the S&P 500. That answer lies in the many products linked to the index. Investment vehicles like S&P 500 ETFs must buy Coinbase stock upon its inclusion to ensure their product reflects the composition of the underlying index. That buying activity can cause price appreciation.
Similarly, companies may benefit from greater visibility after joining the S&P 500, meaning investors may be more likely to recognize and buy shares of the stock. However, tailwinds related to inclusion in the index are temporary. How Coinbase stock performs in the long run depends on financial fundamentals like revenue and earnings.
Coinbase plans to make a smart acquisition, but the stock sitll looks expensive
Coinbase operates the largest cryptocurrency exchange in the United States and the third largest globally as measured by trading volume. The company earns transaction revenue by facilitating the buying and selling of cryptocurrency among retail and institutional investors. Coinbase also earns services revenue from storage, staking, and stablecoin products, as well as subscription fees from its Coinbase One platform.
Coinbase reported lackluster results in the first quarter. Revenue rose 24% to $2 billion on strong momentum in subscription and services, which itself was driven by Coinbase One and its revenue share agreement with Circle, the issuer of stablecoin USDC. A sequential drop in transaction volume prevented revenue from growing faster. Meanwhile, non-GAAP earnings fell 23% to $1.94 per diluted share due to a sharp increase in operating expenses.
Coinbase plans to acquire Deribit, the largest cryptocurrency options exchange, for $2.9 billion in cash and stock. Options are derivatives that give the owner the right (but not the obligation) to buy or sell an asset at a certain price over a specified period. It is reasonable to assume Bitcoin and Ethereum options will become more popular as the cryptocurrency market expands. The Deribit acquisition positions Coinbase to benefit.
Morningstar expects the cryptocurrency market to hit $7.8 trillion by 2035. That implies 136% upside from its current value of $3.3 trillion, which itself implies 9% annualized growth over the next decade. That seems plausible as it roughly matches growth in the last five years. And it's reasonable to think Coinbase's earnings will grow at a similar pace, perhaps slightly faster as the company gains share in derivatives.
In the more immediate future, Wall Street expects Coinbase's earnings to increase at 19% annually through 2026. That consensus makes the current valuation of 49 times earnings look somewhat expensive. Personally, I think investors should wait for a better entry point before buying shares. In the meantime, purchasing a spot Bitcoin ETF is a good way to get exposure to cryptocurrency.
