With the run to new all-time highs in various cryptocurrencies, Coinbase (NASDAQ:COIN) made its highly anticipated debut. However, let’s just say things haven’t gone as planned.
I almost always hold off on IPOs and new listings for a few weeks. I want to see how the stocks trade after coming public; I want to see if there’s strong demand for the stock or if supply overwhelms the buyers. Is it a buy-the-rumor or a sell-the-fact reaction?
In the case of Coinbase, the company’s direct listing helped fuel optimism in the crypto space, allowing various currencies to run to new all-time highs. Once Coinbase started trading though, shares quickly sank — bringing the crypto world down with it.
It has resulted in a short-term top, as buyers lack the strength to take it higher. For now, they haven’t even been able to stem the bleeding.
Coinbase Finally Makes Its Debut
Is the traditional IPO out? It doesn’t seem like too many companies are taking this route lately. Instead its through special-purpose acquisition companies (SPACs) and direct listings.
Coinbase went public on April 14, finally opening for trading at $381. The stock quickly climbed to $429.54, topped out and reversed hard. Shares closed lower by almost $100 from the high — technically putting it in bear market territory as it was down 23.5% from the highs.
That’s not really applicable to Coinbase, given that the first few days are more about price discovery than anything else. However, the stock has now declined in eight of its first nine trading sessions. That’s disappointing for longs.
Down about 32% and it’s not a very bullish reaction thus far. Coinbase came public with plenty of fanfare, so to see it tank makes it clear that this was a “sell-the-news” reaction. That’s just fine, though.
I’d rather take a closer look at a company trading at a discount than one that’s going for a sky-high valuation.
Bullish or Bearish (or Both) on COIN Stock?
Coinbase is a tough one. On the one hand, I’m quite bullish on cryptocurrencies and believe more new highs are on the way. However, it’s hard to deny that the space is experiencing more selling pressure than buying pressure in the short term.
If the crypto space is having trouble rallying, it’s going to be difficult for Coinbase to find its footing. In short, it will likely follow the direction of the leading cryptocurrencies.
No one has a crystal ball — they don’t know where the bottom is for COIN stock or for cryptocurrencies. That leads to near-term uncertainty and unpredictable price movements. However, it doesn’t waver our bullish stance over the longer term.
For instance, take analysts’ estimates. Consensus expectations call for almost 300% revenue growth in 2021. After that though, it’s less clear.
That uncertainty is likely driving some of the weakness in the stock too. Investors crave certainty and they’re willing to pay for it when they see it. There’s likely questions over the company’s margins and ability to drive future growth.
There’s no question that Coinbase is the leading crypto-trading platform. However, how long before other companies step into this space? How long before they undercut Coinbase on its fees? Remember when the retail brokerage space went to zero-commission trading and the entire industry fell in line within a few weeks?
Bottom Line on Coinbase
The bottom line here is pretty simple: When cryptos bottom and start to rally, Coinbase likely will too. If the group continues to decline, it’s likely that Coinbase will too.
In the lead up to its debut, Coinbase had a reference price of $250 a share. The fact that it opened so much higher than that — up more than 50% above that mark — makes this decline less surprising. Same with the dip in crypto.
Should Coinbase decline to that reference price, it may be worth taking a position in the name. While there are risks to Coinbase’s revenue and margin profiles — due to potential competition in the future — this level would seem like a reasonable risk/reward spot for bulls.
With a current low of $282.70, a buy price of $250 isn’t all that farfetched.
At the end of the day, remember this is a new-issue listing and it will take some time for it to find its footing. Eventually, it will hit a point where the price is too low.
On the date of publication, Bret Kenwell did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
