Crypto enthusiasts are no doubt buoyed by the market’s recent rally, indicating a prolonged bear market might not materialize after all.
The upward movement has also coincided with Coinbase’s (COIN) recent blowout earnings. The leading crypto exchange entered the public markets to much fanfare in April, following which the bottom fell out for bitcoin and its fellow digital assets, taking COIN’s share price down with it too.
So, optimism is on the menu again in the crypto sphere, which bodes well for Coinbase, right?
Not so, says Mizuho analyst Dan Dolev. In fact, Dolev thinks there are 3 reasons why investors should “tame some enthusiasm” on all things Coinbase: “(1) COIN may have ceded some Bitcoin market share in 2Q. (2) Retail users traded less in 2Q. (3) Institutional yield continued to fall in 2Q, potentially foreshadowing the future of crypto fee compression.”
Concerning Dolev’s first point, marking a reversal on a previous trend, the analyst estimates Coinbase relinquished about 10bps of bitcoin market share in Q2. While the company has attributed the drop in bitcoin volume to a shift toward other assets, it still doesn’t “fully explain” the apparent decline in market share.
As for point number 2, here was another trend reversal. While the company showed impressive MTUs (monthly transacting users) growth in the quarter, the trading volume per retail MTU exhibited a 16% sequential drop, with incremental volume per user dropping too.
Looking at Dolev’s last point, yield on institutional trading volume dropped from 4bps in 4Q20-1Q21 to 3bps in Q2. Earlier in 2020, COIN notched 5-6bps.
“This could be a sign of what’s to come for crypto trading fees in the future,” Dolev noted, “As our thesis is predicated on shrinking commissions on crypto transactions over time.”
It’s not all bad, however, one metric is moving in the right direction. Given the potential fee compression in crypto trading, Dolev thinks COIN’s reliance on trading fees – especially retail trading fees – is a “long-term risk.” But in Q2, retail transaction fees as a % of net revenue dropped to 90%, a decline from Q1’s 91% in and a further drop from mid-2020’s 92%.
“Continued diversification away from trading fees as a revenue source should be viewed positively, in our view,” the analyst wrapped up.
All in all, there’s no change to Dolev’s rating, which stays a Neutral, although the analyst raised the price target from $210 to $220. Nevertheless, it’s still a 14% drop from current levels. (To watch Dolev’s track record, click here)
Dolev’s target, however, is the Street’s lowest, and at $350.17, the average price target suggests potential upside of ~36%. Based on 10 Buys, vs. 3 Holds and 1 Sell, the stock has a Moderate Buy consensus rating. (See COIN stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
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