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Coinbase has ‘no real urgency’ around liquidity amid crypto winter: Analyst

MoffettNathanson Partner Lisa Ellis joins Yahoo Finance Live to discuss Coinbase's $1 billion loss, volatility in the crypto market, investor sentiment, and the outlook for crypto regulation.

Video transcript

- Coinbase shares have turned higher now. They were down pretty sharply after reporting earnings after the close last night. Had a loss of over a billion dollars in the second quarter. Now they're higher, up by more than 7, more than 6%, I should say. Coinbase also seeing a 64% decline in revenue last quarter, as volatility in the crypto market escalated.

Joining us now to discuss is MoffettNathanson partner, Lisa Ellis. Lisa, first things first, I really appreciated your GenX shout out in your note, and your winter reference from "Little House on the Prairie" and those books. But leaving that aside for a moment, let's talk about the cash position at Coinbase because I know that's something you and other analysts are focusing on here. Is that what's reassuring to investors? Is that why you think the stock is higher here?

LISA ELLIS: Yeah, there's a few factors. That's certainly one of them. The company added to their release yesterday and their discussion around it. A lot more clarity on their cash flow dynamics. It's a bit complicated because of how crypto assets under custody have to be treated in the income statement and the cash flow statement.

And so, they actually kind of gave a bit of a primer around that, which was very useful because investors have been a bit nervous about this dynamic and making sure they could understand how the decline in crypto asset prices and potential customer movement out of crypto into cash, et cetera, may affect them from an operating cash flow perspective.

But the key point is that they're sitting still with comfortably over $6 billion in liquid cash and cash equivalent assets. And the current burn rate on that is running on a go-forward basis at only a couple hundred million dollars per quarter. And so, the implication of that is even if this crypto winter persists for another six quarters, which would be typical, that they last for a couple of years, they'll still be sitting at around $5 billion in cash. So there's no real urgency or concern around liquidity with Coinbase.

- Coinbase is down 62% this year so far. When we think about how the business is tied to one of the most speculative assets that there can be with regard to cryptocurrency. What is the bull case for where they grow out their business from here, how they retain users, and continue to have them buy into other services that Coinbase has?

LISA ELLIS: Yeah, so the most immediate bull case is-- really drives off of two factors. One is institutional adoption of crypto, which continues in the background, even though we've seen this sharp sort of movement from a peak into a trough. Most notably, for example, the major partnership they announced with BlackRock earlier this week, to be integrated as part of BlackRock's institutional platform.

That's a huge step for Coinbase, that they'll basically become the custody provider of choice underneath that platform. It should help institutional assets start to flow more into this asset class, which is really what's needed to support the asset class and kind of start to broaden the adoption to the more mainstream consumer. That's number one.

Number two is certainly regulatory clarity. There we've had some pluses and minuses, I'd say. On one hand, the SEC has been a little bit antagonistic around which tokens should be classified as securities, et cetera. But on the other hand, there's a couple of very constructive bills going through Congress right now that are intended to clarify which crypto should fall under the regulatory purview of the CFTC, versus which ones under the SEC. And just that basic level of regulatory clarity will be a huge step forward for the industry. It's a big thing holding back the stock right now.

- Lisa, let's talk intangibles here. You've seen a lot of earnings calls, you've seen a lot of earnings statements. Just very curious on how, or what you thought about the layout of their earnings release. Does this team get it? Because this has been a bad post-IPO performance for Coinbase. The stock is under pressure, you have rivals around this business fumbling and going out of business. A lot of bad headlines in this industry. Do you sense the management team there gets it, and they are finally showing some humbleness?

LISA ELLIS: They are. I mean, each quarter they're in many ways having to define what it means to be a publicly listed company as a crypto company. They're kind of the one large cap company that's in the crypto space. So they're having to kind of learn as they go. But each quarter, they elaborate and help a lot with their disclosures to help investors overcome some of these hurdles.

This quarter was no exception, where they talked very directly about the cyclicality of crypto, and how they have as a company gone through now four cycles in how they think about managing their investments. They gave a lot more definitive clarity on where their expenses are going to go, so investors can at least get comfortable with what that expense line is going to look like, and eliminate some of that uncertainty. And then as I mentioned, they talked a lot about cash flow, and how their cash position, you know, what the outlook is there.

So they've been addressing very directly and head on, like literally, truly hearing from investors what the bearish, what the concerns are. And going to great lengths to address those head on.

- And talking about that forecasting, and talk about cash flow, I want to talk about the EBITDA forecast, or what they are calling the EBITDA loss guardrail, in the words of Coinbase. That they're working hard to operate within $500 million adjusted EBITDA loss guardrail for 2022. Do you think that they can meet that target?

LISA ELLIS: Yeah, look, as long as the crypto markets stay at running at the kind of rate they're running right now in terms of asset values and a level of trading volume flowing through the crypto market. It's like, meaning, as long as it doesn't get materially worse again, then they can meet that number. They've now set their expense outlook for the year such that they should be able to hit that number. And that's what we're forecasting. We're forecasting something pretty close to that $500 million guardrail.

And just for-- it's an adjusted EBITDA number, but what that really is is a communication of sort of operating cash flow. So they're essentially saying, we're going to run this business to make sure that our operating cash flow is not more than $500 million negative, even in the worst year of a crypto down cycle. Which helps investors kind of put some guardrails around how they should think about the parameters of this business over the long term, realizing how cyclical this market is.

- Indeed it is. Lisa Ellis, MoffettNathanson partner. Thanks so much for being here, and also, as a result of this, I learned the Brian Sozzi's favorite show when he was growing up was "Little House on the Prairie." So, you did multiple things for us today.

- True story.

- Thanks again, Lisa. Good to see you.