Shares of a popular crypto exchange platform Coinbase (COIN) have been under an absurd amount of sales pressure this past year, down 75% from peak to trough. The downside momentum was unforgiving even for the most daring investors. Innovation investor Kathy Wood recently announced that she has thrown in the towel regarding the reported SEC investigation. Undoubtedly, the SEC’s securities warning is yet another salt poured into the wounds of Coinbase’s already sick shareholders.
With Cathie Wood likely to sell her stake at a significant loss, many investors are likely to find themselves in a bit of a bind. In any case, Coinbase stock has already suffered far more damage than most established cryptocurrencies, including Bitcoin. Indeed, the increased volatility across various crypto assets came as a surprise to some. Few could have seen the SEC hailstorm that made headlines just over a week ago.
With the so-called crypto winter likely to linger as speculative appetite dies down, the case for taking some profit off the table after the recent rally to the rescue is strong. Although Cathie Wood errs on the side of caution, bold investors who still believe in the future of crypto infrastructure may still have plenty of reason to hold on for dear life (HODL), as meme stock investors put it.
Indeed, the recent rally to help in the broader basket of risk assets is encouraging. Whether Bitcoin’s test of $24,000 marks the beginning of the end of crypto winter remains to be seen. If the reversal of the crypto relief rally holds, it is possible that COIN stocks will increase the gains that can be made in the crypto markets.
In any case, the high potential for rewards comes with equally high risks. While the valuation looks enticing at around $91 and change per share, being picked by the SEC introduces huge risks that are difficult to measure.
Coinbase stock is hard to value
At 3.6 times sales, Coinbase is far cheaper than most defensive value stocks that have traded in the past few months. While Coinbase may have gained more when crypto markets were flying high, it’s hard to say how long the subsequent period of under-profitability will last. The single-digit price-to-earnings (P/E) ratio is now negative, leaving only price-to-sales (P/S). For investors who had latched onto the idea that the name was a compelling value play, the shift to a loss made the company much harder to value.
Rising interest rates, a potential crypto winter and now the SEC’s involvement have created the perfect storm. So far, it’s hard to blame Cathie Wood for the Coinbase split. While she may still believe in the future of crypto and blockchain, there are other firms that don’t have the same degree of concern from the SEC.
Most of all, Blocking (sq)former square is fintech with a crypto flavor which Cathie Wood may wish to double as the fintech waters continue to emerge. Like Coinbase, Block’s last quarter was weighed down by weakness in bitcoin prices. In any case, Block does not depend on the health of the crypto markets, as Coinbase does, thanks to its stable payment businesses.
Coinbase shares under pressure after ugly second quarter
For the second quarter, the company saw falling cryptocurrency prices weigh heavily on trading volumes. Net income fell more than 60% to $803 million, while Coinbase’s loss per share came in at -$4.98, far worse than analysts’ consensus estimate of -$2.47.
Coinbase suffered a brutal implosion that famous short trader Jim Chanos saw from a mile away. Given that transaction fees account for the vast majority of revenue (around 80%), Coinbase is closely related to the price of crypto assets.
Coinbase shares are being snapped up by Meme Stock traders
With Bitcoin’s recent relief and the broader basket, there is hope that a full crypto winter can be avoided. Amid easing in the stock market, speculative activity picked up, with various meme stocks trading higher. Indeed, Coinbase stock seems like a meme stock in its own right, given the recent activity on Reddit’s WallStreetBets forum.
Coinbase shares rebounded shortly after its partnership with BlackRock (BLACK) was announced. As part of the deal, institutional clients will have the ability to buy bitcoin through the platform.
While it’s hard to gauge where the wild waters of crypto waters will head, news like this is encouraging for investors who have had nothing but bad news lately.
Is it buying or selling?
Turning to Wall Street, COIN has a consensus rating of moderate buy based on 10 buys, 7 holds and 2 sells assigned over the past three months. The average target price of $101.18 suggests ~12% upside potential. (Check out the COIN stock forecast at TipRanks)
Coinbase remains a high-risk/high-reward play that is guaranteed to be an incredibly volatile time for investors. While further crypto strengthening could fuel a continued recovery in Coinbase stock, investors should not underestimate the implications of continued SEC involvement. Indeed, stocks seem too risky for Cathy Wood, a bold investor who remains incredibly optimistic about the future of crypto.
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Disclaimer: The information contained in this article represents the views and opinions of the author alone and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. At the time of publication, the author had no position in any of the securities mentioned in this article.