Already pushed lower from changing cryptocurrency market conditions, recent scandals in the digital asset sphere have put even more pressure on Coinbase (NASDAQ:COIN) stock.
Trading for around $75 per share less than two months ago, COIN stock has since dropped below $40 per share, following the high-profile collapse of crypto exchange FTX Trading Ltd. in November.
Although not materially exposed, the FTX bankruptcy creates yet another headwind for this cryptocurrency exchange going forward. Already challenged by the crypto bear market, commonly referred to as “crypto winter,” the drop in confidence resulting from this event will likely have a negative impact on crypto trading volumes, and in turn, revenue, now and in the quarters ahead.
That’s not all. The negative factors that drove Coinbase shares on a downward trajectory in the first place remain in play. All of this signals that avoiding this stock remains the best move.
Why the FTX Blowup Hurts COIN Stock
FTX founder Sam Bankman-Fried is in custody. The price of major cryptos such as Bitcoin (CCC:BTC-USD) have inched higher after selling off during November.
FTX’s bankruptcy has left billions in capital, including that of everyday investors, in limbo. Chances are this has further diminished the retail public’s already-soured appetite for crypto investing.
As you likely know, the decline in cryptocurrency prices over the past year, and the resultant drop in the number of people actively trading crypto has already had a severe impact on Coinbase’s operating performance.
During the September quarter, revenue fell 55% year-over-year. For the full year 2022, the revenue decline could be even more severe. Coinbase’s CEO, Brian Armstrong, has publicly stated that total revenue this year will be “half that or less” than last year’s figure. Sell-side consensus calls for a 59% year-over-year drop in COIN’s top line.
Although the FTX scandal will probably not result in another high double-digit revenue drop next year, this factor, atop existing factors, could limit the extent to which results improve over the coming year.
‘Crypto Winter’ May Last a Few More Seasons
Kicking off last winter, the crypto market’s winter has carried onto through the spring, summer and fall. Worse yet, far from coming to a close as actual winter begins in the Northern hemisphere, the icy conditions of the digital asset space are likely to continue in the year ahead.
The massive sell-offs may be over, but there’s out there at present that could potentially spark a rally. Although the Federal Reserve is now slowing down the pace of rate hikes, a “Fed pivot,” or a re-lowering of interest rates, likely remains far off.
Institutional investors, the so-called “smart money,” do not seem to be on the verge of jumping back into the space. According to Barron’s, bearish bets on BTC are piling up. Throw the FTX scandal (which underscores the risky nature of this asset class) atop these factors, and it’s hard to see retail traders coming back into this space with full force next year.
In turn, Coinbase’s financials are not likely to improve, whether this quarter or even a few quarters from now. With high fixed costs resulting in massive net losses, this continued deterioration leaves COIN stock poised for another drop.
The Bottom Line
Besides placing bearish bets on BTC, the “smart money” has placed quite a few bearish bets on Coinbase stock itself. According to Fintel.io, 25.3% of COIN’s outstanding float has been sold short.
Sure, these short positions may not pay off in a “big short” sort of fashion. With $5 billion in unrestricted cash on hand, the company isn’t at immediate risk of facing its own bankruptcy moment.
Still, as the above-mentioned factors mean that the company’s poor operating performance persists, an additional de-rating may be in store. Many struggling financial institutions end up trading at a discount to tangible book value, and Coinbase’s tangible book is less than half that of its current stock price.
With more pointing to shares sinking deeper into the icy ‘crypto winter’ waters, don’t simply walk away from/steer clear of COIN stock. Run!
COIN stock earns an F rating in Portfolio Grader.
On the date of publication, Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.