Coinbase Global, Inc. (COIN) has surged 82.7% year-to-date to close the last trading session at $64.67. The stock is trading above its 50-day and 200-day moving averages of $51.68 and $60.48, respectively. However, I think it might be wise to be skeptical about this rally because of the reasons explained throughout this article.

The fintech company provides end-to-end financial infrastructure and technology for the global crypto economy. The company offers financial accounts for retail crypto users, a liquid marketplace to institutions for crypto transactions, and technology and services for ecosystem partners.

Although COIN’s revenue has exhibited an 82% CAGR over the past three years, and its net assets have increased at a 234.8% CAGR over the same time horizon, the view from the windshield couldn’t be more contrasting to the image in the rearview mirror.

In addition to battling stronger-than-ever macroeconomic headwinds due to increasing interest rates, the cryptocurrency ecosystem has been rocked by scandals in fiscal 2022, such as the depegging of $LUNA and the collapse of FTX, which drove additional credit-related bankruptcies. These events have exposed systemic risk to the ecosystem and have driven political will favoring regulation.

Let’s closely examine COIN’s fundamentals:

Dismal Financial Performance

For the fiscal year that ended December 31, 2022, one that was tempestuous for the cryptocurrency ecosystem, COIN’s net revenue declined 57.2% year-over-year to $3.15 billion. Due to the ongoing crypto winter, a 65.5% year-over-year decrease in total transaction revenue to $2.36 billion was mildly offset by a 53.5% year-over-year increase in total subscription and services revenue to $792.6 million.

Notwithstanding consistency with its outlook, COIN reported an adjusted EBITDA loss and a net loss of $371.40 million and $2.63 billion, respectively, compared to the adjusted EBITDA of $4.09 billion and net income of $3.62 million during the previous fiscal.

Poor Profitability

Although COIN’s 100% trailing-12-month gross profit margin is significantly higher than the industry average of 64.05%, its trailing-12-month EBITDA and net income margins of negative 60.32% and 83.35%, compared to the respective industry averages of 21.28% and 27.46%, despite its headcount reduction and ongoing cost management efforts is a major cause for concern.

On the capital discipline front, COIN’s negative trailing 12-month ROCE, ROTC, and ROTA also fall significantly short of the respective industry averages of 11.17%, 5.01%, and 1.17%.

Bleak Analyst Estimates

Analysts expect COIN’s revenue for the first quarter of fiscal 2023 to decline 43.3% year-over-year to $663.80 million. During the same period, the company’s loss per share is expected to come in at $0.98 compared to $0.12 during the previous-year quarter.

For fiscal 2023, COIN’s revenue is expected to decline 10.4% year-over-year to $2.86 billion, while it is expected to report a loss of $1.67 per share. The company is expected to keep reporting losses over the next two fiscals.

Moreover, COIN has missed its consensus EPS estimates in three of the trailing four fiscals.

Stretched Valuation

COIN’s forward EV/Sales and EV/EBITDA multiples of 4.97 and 376.76 are exorbitant compared to the respective industry averages of 1.90 and 10.62.

As a result of the recent surge in its stock price, COIN’s forward Price/Sales and Price/Book ratios of 5.24 and 2.83 also compare unfavorably to the industry averages of 2.51 and 1.14, respectively.

In view of an absence of a clear path to profitability, such frothy valuations increase the downside risk for the stock.

POWR Ratings Reflect Weakness

COIN’s weak fundamentals and bleak outlook are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COIN also has grade F for Value and Stability, in sync with stretched valuation, a 24-month beta of 2.86, and a relatively large spread between its 52-week high and low prices of $206.79 and $31.55, respectively.

COIN has a D grade for Quality and Sentiment, consistent with poor profitability, poor capital discipline, and underwhelming analyst estimates.

COIN ranks #135 of 139 stocks in the Software – Application industry.

Click here for additional POWR Ratings for the Growth and Momentum of COIN.

Existential Risks Ahead

The risks posed by COIN’s weak fundamentals, stretched valuation, and volatile stock price dwarf in comparison risks posed by the escalating tensions between the crypto exchange and U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler with the regulator’s move to classify most cryptocurrencies as unregistered securities, which would expose COIN to massive penalties and further regulatory scrutiny and clamp down.

Moreover, a potential SEC move to ban the practice of staking, or the locking up of tokens to receive a return, threatens to pile additional misery on the top line of COIN. This comes after the SEC signaled in the fall that cryptocurrencies that rely on staking might be deemed securities.

Looking at the bigger picture, although COIN has said that it looks forward to working with regulators globally, increased regulation might erode the value of cryptocurrencies, which were supposed to be decentralized and deregulated stores of value and medium of exchange. Here’s Ray Dalio sounding the alarm as early as September 2021.

Bottom Line

Given the above factors, since cryptocurrencies are an integral part of COIN’s founding principle and business model, it would be wise to give the stock a wide berth until the fate of its core asset class becomes clearer.

Stocks to consider instead of Coinbase Global, Inc. (COIN)

Given its uncertain prospects and the recent surge in stock price, the odds of Coinbase outperforming in the weeks and months ahead are greatly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Software – Application industry instead:

Commvault Systems, Inc. (CVLT)

Magic Software Enterprises Ltd. (MGIC)

Xperi Inc. (XPER)

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COIN shares were trading at $62.68 per share on Thursday afternoon, down $1.99 (-3.08%). Year-to-date, COIN has gained 77.11%, versus a 3.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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