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Wells Fargo starts COIN coverage with 'Underweight' rating of $57

Wells Fargo initiated coverage of Coinbase Global (COIN) with an underweight price target of $57 per share in 2023, citing such profit headwinds as regulation and increased competition amid a "crypto winter."

"We expect the weakness in crypto/crypto trading volumes to persist through the back half of the year given weakening macro/consumer and lack of any significant stimulus," Wells Fargo equity analysts said in their first COIN note.

The analysts valued the company on a enterprise value-to-sales basis applied a 2.5x multiple to their 2023 revenue estimate to calculate their price target, which they called a "fair value, in our view, for a high-quality company, but one that operates in an industry characterized by pricing pressure, competition, and increasing regulation, with an unclear path to sustainable profitability in the [medium term/long term]."

COIN shares dropped 9.4% to $60.98 apiece in Thursday morning trading after they rallied 7% over the last five days. Over the past three months, Coinbase stock has regained 27% of its value from $48. Year to date, the stock has dropped more than 76% from $253.

A representation of the cryptocurrency is seen in front of Coinbase logo in this illustration taken, March 4, 2022. REUTERS/Dado Ruvic/Illustration
A representation of the cryptocurrency is seen in front of Coinbase logo in this illustration taken, March 4, 2022. REUTERS/Dado Ruvic/Illustration

In its second-quarter earnings results, Coinbase posted a $1.1 billion net loss with as much as 41% coming from the decline in value of the crypto assets on its balance sheet during the market's lowest point in the quarter.

Yet, with more than $6 billion in cash, the firm should be fit to weather the downturn as long as its costs stay down even if crypto assets persist in a bear market through the end of 2023, Lisa Ellis, partner with MoffettNathanson, told Yahoo Finance

Wells Fargo anticipates a 56% year-over-year decline in Coinbase's revenue from retail transactions to $451 million, putting their estimates below the Street's consensus for the stock in 2023.

Last week, JPMorgan lowered its end of year price target for COIN from $78 to $60. The bank pointed to falling interest in cryptocurrencies as the main issue.

Going forward, Wells Fargo analysts see retail trading volume as the largest U.S. exchange's most significant revenue driver. The analyst is pricing in the continued decline in COIN's retail customers in light of macro conditions and increased pressure from competitors offering lower trading fees.

"Though we believe in the value of COIN's platform, we see its early-mover advantages gradually being eroded away as the competition increasingly mimics the COIN ecosystem," the analysts said in the note.

Major exchange fees collected by Wells Fargo
Major exchange fees collected by Wells Fargo

Wells Fargo analysts said the "retail take rate" — or how much revenue per retail transaction the exchange earns — as well as monthly transacting users (MTUs) as critical for gauging the firm's health.

"Binance now offers $0 fees for BTC and ETH. From a wider lens, historically we've watched brokerage firms follow a similar path of pricing compression over time—essentially, pricing is a 'race to $0,'" the analysts said.

Expectations of crypto regulation in the U.S. as well as Coinbase's institutional trading business also play a role in how the analysts estimate the exchange's performance.

For positive catalysts, Wells Fargo's analysts pointed to more institutional partnerships — such as that inked with BlackRock earlier this quarter — and progress in Coinbase's subscription services, which accounted for 18% of its revenue in the previous quarter.


David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers

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