Shares of Coinbase (NASDAQ:COIN) are falling by more than 8% after Goldman Sachs analyst Will Nance downgraded COIN stock from “neutral” to “sell.” The analyst also lowered his price target from $70 to $45, a reduction of 35%.
Cryptocurrency exchanges have come under pressure in recent weeks due to the decline in the crypto market. Meanwhile, exchanges like BlockFi and Voyager disclosed that they had exposure to Three Arrows Capital (3AC). The crypto hedge fund is facing insolvency issues after its highly leveraged bets turned sour.
Today, Voyager announced it would issue 3AC a notice of default for failing to make payments on a loan worth 15,250 Bitcoins (BTC-USD) and $350 million in USD Coin (USDC-USD).
With much uncertainty in the crypto markets, let’s get into the details of the Coinbase downgrade.
COIN Stock: Goldman Sachs Lowers Price Target to $45
CNBC contributor Lawrence McDonald notes Goldman led Coinbase’s initial public offering. In November of 2021, the investment bank had a COIN price target as high as $387. The current price target of $45 represents an 88% reduction from the November price target.
Nance believes the current crypto market conditions and trading volumes imply “further degradation” in Coinbase’s revenue. He sees revenue falling 61% year-over-year (YOY) in 2022 and 73% in the second half of the year.
Furthermore, the analyst notes Coinbase recently cut 18% of its global workforce. However, he believes further cuts are needed, as the company is now back to the same headcount it had at the end of Q1.
Meanwhile, the company’s high stock-based compensation (SBC) remains a problem as well. Nance believes Coinbase’s guidance of $420 million in SBC will make up 42% of forecasted 2022 revenue. The popular crypto exchange will soon have to make the difficult decision of further share dilution or reductions in SBC. The latter may make it harder to attract and retain talented employees.
Nance adds he is concerned about the company’s competitive environment. The analyst isn’t worried about Binance’s decision to reduce fees on Bitcoin pairs. Still, he explains the reduced fees may lead to “fee rate compression over time.”
Finally, Nance concludes his downgrade by saying that Coinbase’s valuation is limited due to volatile crypto prices. He states higher revenues in the near term would ultimately require higher crypto prices.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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