Coinbase Stock May Be Stuck in a Rut Because Crypto Competition Is Heating Up

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Coinbase Global

‘s revenues may be gaining momentum, but some analysts see scant upside in its stock as competition from rival cryptocurrency trading platforms heats up. 

Shares of

Coinbase Global

(ticker: COIN) have fallen sharply from their debut price of $381 on April 14. The stock hovered around $278 in midday trading Tuesday. The company is scheduled to report first-quarter earnings on May 13 after the close.

Mizuho Securities’
Dan Dolev
raised his second-quarter revenue estimates by $300 million, for instance, expecting the company to report $1.6 billion in total revenue for the quarter. Average daily trading volume hit $3.7 billion in April, he estimates, implying $330 billion in volume for the second quarter, down only slightly from the first quarter.

That would be a win for Coinbase, which was expected to report a steeper slowdown in trading volume from the first quarter. Dolev raised his fiscal 2021 revenue estimate to $5.6 billion, from $5.1 billion, and increased his price target on the stock to $315 from $285.

But the analyst kept a Neutral rating, saying he’s “cautious” on the medium term outlook. And he joins a few other analysts who aren’t convinced there’s much upside in the shares. Bernstein Research’s Harshita Rawat, for instance, launched on Coinbase last week with a Market Perform rating and $250 target. Keefe, Bruyette & Woods analyst
Kyle Voigt
has a Hold on the stock and a $325 target.

The headwind for Coinbase isn’t trading volumes, the price of Bitcoin (BTC) or other cryptos, or the growing acceptance of crypto as a currency that can be used for purchases at retail. Auction house Sotheby’s, for instance, said Tuesday that it would start accepting payment for artworks in Ether (ETC) or Bitcoin through a partnership with Coinbase. The first auction will be a piece by the artist Banksy, set to be sold on May 12. Bidding starts at $3 million.

The challenge for Coinbase is to protect its commissions as other trading platforms go after the same retail market. Consequently, Coinbase might have to cut its commissions to stay competitive—and that would mean a drop in profit margins.

“With over 80% of total revenue reliant on retail transaction fees, significant user overlap with

PayPal

and Square’s Cash App, and high user sensitivity to transaction fees, the specter of downward pressure on commissions is a concern,” Dolev wrote in a note on Tuesday. 

PayPal

(PYPL) and

Square

(SQ) are both marketing their apps to crypto investors or people who just want to dabble with a few bucks in their digital wallets. They view crypto as an “engagement” tool for the payment apps, noted Dolev, while Coinbase earns the bulk of its revenue from commissions.

Trading crypto on Coinbase is pricey by equity market standards, which is commission-free on most discount brokerages. Coinbase charges a base rate of 4% on all transactions, though it cuts the rate to 1.49% for traders who fund their purchase from a bank account or Coinbase digital wallet. If a trader uses a debit card or PayPal account to fund a crypto purchase, however, the transaction fee is 3.99%.  

PayPal’s trading fee is 2.3% for crypto purchases of $25 to $100, going down to 1.50% for purchases over $1,000.

Square charges variable fees, based on market activity and price volatility of Bitcoin. The company makes money off the spread, or the difference in price between its purchase of the crypto asset and sale price.

Robinhood, which is gearing up to go public, says crypto investing is commission-free on its app. The brokerage says it earns money on crypto-trading through “rebates and “pass on fees” from other trading venues. 

Some of that commission pressure is already baked into analysts’ estimates for Coinbase. The company is expected to report GAAP earnings of $6.91 a share this year and $3.37 in 2022, going down to $2.68 in 2023, according to FactSet. With EPS heading lower, investors are now paying 76 times 2022 estimated earnings or 12 times sales, steep multiples compared to other exchanges.

Write to Daren Fonda at daren.fonda@barrons.com