Don’t Count on a Quick Recovery in Coinbase’s Finances

Coinbase Global (NASDAQ:COIN) has been the opposite of a buy-and-hold stock in 2022. It has crashed by over 80%, a massive drop that is hard for investors to recover from. It is not impossible, but it is very hard, and it will require a lot of time and a lot of patience — plus a whole bunch of good news. Buying COIN stock near $251 in January 2022 only to see it drop well below $50 is what I consider to be a very bad call. Unfortunately for those investors, I don’t see much to suggest we’ll get a rebound of COIN stock.

But with the massive discount, is investing in Coinbase Global now a good idea? I am convinced it is not and here are three reasons that back up this thesis.

COIN Stock Q1 Earnings Were a Total Disappointment

Looking at the revenue and net income trends for Coinbase Global on annual basis will make investors happy, as they are both showing an uptrend. But turning to quarterly results shows a different story entirely. Coinbase delivered a disappointing Q1 2022 earnings report. The company not only missed analysts’ revenue estimates, but missed EPS estimates as well.

The EPS GAAP figure of -$1.98 got nowhere near expectations for -12 cents and the revenue figure of $1.17 billion came in $309.61 million under expectations.

The revenue for the quarter fell 27% year-over-year and the company reported a net loss of $430 million, whereas it was profitable in the past four consecutive quarters.

There was more bad news due to the decline in total trading volume and in monthly transacting users. Quarter-over-quarter monthly transacting users fell to 9.2 million in Q1 2022 versus 11.4 million in Q4 2021 — thought that figure is still up from the year-ago measure of 6.1 million. And total trading volume fell to $309 billion from $547 billion in the previous quarter and $335 billion a year ago.

What is the main problem? Profitability and growth are now under severe pressure. Sales growth has slowed down and net income is making investors wonder if this Q1 2022 net loss is a one-time event or a sign of more trouble ahead.

This is answered with the second argument against COIN stock now.

Binance has announced zero fees for trading Bitcoin (BTC-USD) on the spot market.

“BinanceUS will now allow its users to trade bitcoin, the biggest cryptocurrency, against assets such as the U.S. dollar, tether, and other dollar-backed stablecoins for free, eliminating its prior levy of 0.1% on transaction valued at less than $50,00,” according to an article on TheStreet.

The article quoted Biance as writing in a release, “We see this as an opportunity to revolutionize the way fees are approached in our industry.”

Coinbase has a business model that relies on transaction revenue, with Bitcoin accounting for 24% of its total transaction revenue in Q1 2022. This price war started by Binance could lead to users shifting to Binance from Coinbase, resulting in even fewer monthly transacting users for Coinbase. And that means lower revenue that should harm profitability.

The Impact of a Crypto Winter

What is a crypto winter and why does it matter?

Crypto winter is like a bear market, meaning prolonged lower prices for cryptocurrencies. The current macroeconomic news that has made investors fear a recession for the U.S. economy is also hurting crypto’s chances of a rebound — or at least a rebound that will last. Right now, rallies seems to be very short-lived.

Crypto as a risk asset now seems to be out of favor. It’s not an inflation hedge either. This crypto winter can only mean bad news for COIN stock, with higher odds of it moving lower, as any future misses on EPS and revenue will cause volatile sell-offs again.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.