Right before popular cryptocurrency trading platform Coinbase Global (NASDAQ:COIN) had its public debut on the Nasdaq Exchange, I recommended that investors should learn the essential facts before jumping into Coinbase stock.
Unfortunately, I suspect that many traders didn’t heed my advice. And while some institutional investors might have gotten in at a more favorable price, some retail traders are probably “holding the bag” right now.
Maybe it’s still to early in the game to call COIN stock a “flop,” but there’s definitely been a feeling of disappointment in the air.
Today, I’ll identify reasons to consider taking a long position in the stock. At the same time, I’ll take note of a prominent analyst’s tepid tone on Coinbase.
Analyzing the Coinbase Market Debut
There’s a common misconception that Coinbase had an initial public offering (IPO). In actuality, its was a direct public offering (DPO).
I’d say that having a direct listing instead of an IPO was a sensible move. A direct listing can allow the company to sell shares directly to the public without any intermediaries involved, potentially making the process more cost-efficient.
In any case, the direct listing took place on Apr. 14, reportedly with a starting price of $250 per share.
I was watching carefully that day, monitoring the COIN share price through my broker’s trading platform.
Realistically, it would have been difficult or impossible for the vast majority of retail investors to get the shares at $250. As I recall, the stock price almost immediately went above $300 after the opening bell rang that day.
As it turned out, Coinbase stock shot up by nearly 72% to $429.54 at one point during that first day. Yet, the stock closed at $328.28.
That’s up 31.3% from $250, but again, I doubt that many retail traders were able to buy at $250.
By the end of April, COIN had declined to $297.64. It appears that the $300 level may continue to be a battle zone for the bulls and bears for a while.
Speaking of battles, the analysts don’t all agree on Coinbase. Wedbush analyst Dan Ives offers a pretty good representation of the bull thesis, though he incorrectly identifies the COIN debut as an IPO:
“The Coinbase IPO is potentially a watershed event for the crypto industry… Coinbase is a foundational piece of the crypto ecosystem and is a barometer for the growing mainstream adoption of Bitcoin and crypto for the coming years.”
Ives adds that Wall Street will use Coinbase to “gauge investor appetite” for the cryptocurrency market.
That’s a reasonable assessment. Coinbase is notorious for its high fees, but it’s still the largest cryptocurrency exchange in the U.S.
Therefore, if the COIN bulls want to hold their shares in anticipation of crypto’s mainstream adoption, I respect that position.
Noting the Competition
As I mentioned earlier, the analysts are divided on Coinbase.
Mizuho analyst Dan Dolev, for example, took a lukewarm stance on COIN. Specifically, Dolev initiated coverage on the stock with a “neutral” rating.
Moreover, Dolev assigned it a price target of $285, which isn’t particularly ambitious.
This might seem unduly bearish, but Dolev’s argument has merit to it.
“Over time, Coinbase pricing — and industry pricing in general — may face downward pressure from platforms like PayPal and Cash App,” Dolev explained.
Again, we can emphasize Coinbase’s comparatively high fees here.
Doley’s argument continues: “This is because PayPal and Cash App primarily use their crypto trading products as engagement tools.” In contrast, Coinbase “relies on its crypto trading products as its main source of revenue and profitability.”
And indeed, as of 2020, around 90% of Coinbase’s revenues were derived from transaction fees from trading and services like storage.
The Bottom Line
Cautious investors should take Doley’s concerns seriously. If Coinbase’s competition gains traction, that could spell trouble for COIN.
I’m not suggesting that investors should just dump their shares right now. That would be hasty, and could lead to unnecessary capital loss.
In general, cryptocurrency probably has a bright future ahead of it. Mainstream adoption will be the key to its long-term success.
Therefore, it’s possible to take a small position in Coinbase as a wager on the expansion of the crypto ecosystem.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.