There seems to be a correlation between the number of new MTUs (Monthly Transacting Users) at Coinbase Global (NASDAQ:COIN) and Coinbase’s earnings as well as COIN stock. The higher the numbers each quarter the higher the earnings and stock price.
All you have to do is look at its latest earnings release and shareholder letter from Aug. 10. Coinbase shows on page 2 of the letter that its MTUs rose from 2.8 million during Q4 to 8.8 million in Q2.
This exponential rise, of course, led to a similar skyrocketing of its profits in terms of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). It rose from $288 million in Q4 to $1.15 billion by the end of Q2. MTUs were over 3 times higher and adj. EBITDA was 4 times higher.
And from its trough on June 8, when COIN stock was at $220.66, it is now up to $248.32, or up 12.5% from its trough. However, the stock previously was at a high of $342 on April 16 right after it went public on April 14.
At the end of its shareholder letter, Coinbase reported that the July MTUs were down to 6.8 million. This fall from 8.8 million in Q2 could account for why the stock fell after the earnings report came out. Investors don’t like surprises. COIN stock fell from $280.47 on Aug. 9 to $244.39 on Aug. 18 and it has slowly drifted up from then.
Since then Coinbase reported that August MTUs had improved “slightly” but remain lower than at the beginning of the year. This is probably why the stock has not done well so far this quarter.
However, given that Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) take up such a huge percentage of its trading, if they rise, I think you will see a comparable gain in MTUs. I pointed this out in several articles, including one in May and one recently in mid-August.
In fact, there is probably a higher correlation between the price of these cryptocurrencies and the earnings and COIN stock than even MTUs. The MTUs will grow if cryptos are seen as on the rise and they tend to wane if crypto prices drop. That in essence was the theme of my article in May when I wrote that crypto trading was essentially a function of crypto price gains, especially Bitcoin and Ethereum.
What To Do With Coin Stock
Most analysts on Coinbase stock still feel that it is worth significantly more than today’s price. For example, the Refinitiv analyst survey, reported by Yahoo! Finance, shows that 19 analysts have an average target price of $385.95, or 55.4% over today’s price.
However, Seeking Alpha’s survey of 20 analysts indicates that their average price target is $335.53, or 35.1% over today. In between these two extremes is the TipRanks.com survey. It shows that 15 analysts who have written on the stock in the last 3 months have an average target of $350.17, or 41% higher than today.
So the average of all three of these surveys is a price target of $357.22, or 43.9% over today. This is similar to my own price of $359.87 in my last article based on the company’s adjusted EBITDA and using a 25 times EV/EBITDA multiple.
But again, this assumes that the company’s MTUs and crypto prices rise by the end of the year. Assuming that this happens, then my target is still good. But if crypto prices stay flat, I don’t see the COIN stock rising to that target price for a while.
As a result, investors should be cautious with COIN stock. It is highly correlated to MTU growth and that is highly correlated to Bitcoin and Ethereum’s price gains.
On the date of publication, Mark R. Hake held a long position in Bitcoin and Ethereum, but in no other security mentioned in this article, directly or indirectly. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.