as Coinbase’s stock won’t end any time soon, according to a demotion note from Goldman Sachs on Monday.
The bank said the sharp drop in bitcoin and other cryptocurrencies is expected to drive down trading volumes, which is critical for a crypto exchange like Coinbase to thrive. Goldman Sachs analyst Will Nance downgraded Coinbase to “Sell” from “Neutral” and set a price target of $45, implying a potential downside of 23% from current levels.
Shares of Coinbase fell 11% on Monday and are down 86% from their all-time high as cryptocurrencies have erased billions of dollars in value since bitcoin peaked in November. Sentiment has been crushed in the crypto space after several high-profile stablecoin implosions resulted in billions of dollars in losses for investors, and increased regulation will likely further reduce Coinbase’s revenue, according to the note.
Based on current levels of crypto assets and trading volumes, Nance estimated that Coinbase revenue would drop 61% year-over-year in 2022.
And while Coinbase announced an 18% reduction in its workforce earlier this month, these cost-cutting measures are unlikely to be enough, and further job cuts are likely, according to the memo.
“We believe Coinbase will need to make substantial reductions in its cost base to stem the resulting cash burn as retail activity dries up,” Nance said, adding that the extensive program of The company’s stock-based compensation could lead to significant shareholder dilution and/or lead to a talent drain as its stock becomes less attractive as a form of payment for employees.
Competition is also heating up for Coinbase, which could put significant pressure on the company in the coming months and lead to a rapid price squeeze.
“From a valuation perspective, with Coinbase trading at around $11.5 billion
relative to its net cash position of approximately $3.8 billion, we believe valuation support is limited as higher near-term revenue would require higher crypto prices and we expect a breakeven point to negative Adjusted EBITDA over the next few years,” Nance said.
It has been difficult for Coinbase since its IPO last year. If Goldman Sachs is correct and Coinbase hits its price target of $45, that would represent a total drawdown of almost 90% for the stock.