Summary Coinbase dropped sharply in 2022. We believe cryptocurrencies are a speculative bubble of the highest order and volumes will continue to trend lower. One cannot rule out a bounce for Coinbase but we think the longer-term trajectory remains firmly down. When we wrote about Coinbase Global, Inc. ( COIN ) in August 2022, we told investors that this stood as one of the worst picks within the ARK Next Generation Internet ETF's ( ARKW ) holdings. That was quite an honor in a line-up filled with some rather illustrious money losers. Specifically we said, The Q2-2022 results were just breathtakingly bad and it was a special treat to see just how far off base the bulls were on this one. The company reported revenues that almost dropped by two thirds (growth stock, so why not) and it managed to lose $1.24 billion pre-tax on $800 million of revenues. Stock based compensation is making up 60% of revenues. Do you expect this firm to ever hit profitability? Our answer is no and we expect the firm will likely visit single digits pretty soon. Source: When Growth Is Ashes, You Have My Permission To Buy COIN has not reached single digits, but the trend is definitely your friend. Data by YCharts We examine the recent developments and the analyst sentiment to update our thesis. Q3-2022 While we have often had a pessimistic bent on a certain genre of stocks, it does occasionally happen that a few do far worse than even what we envisioned. COIN's third quarter was something like that with net revenues dropping about 55%. COIN Q3-2022 Letter 55% revenue drops are not at all common even in the middle of recessions for most types of companies. Of course, when the base of your business is built on cryptocurrencies, things accelerate down when there is no one left to buy. The 55% revenue drop was made worse by the fact that expenses went up 12.35%. Only transaction expense matched the revenue decline and increases in the general and administrative expense category was a horror show. The bleed was strong and COIN lost $2.43 in one quarter. For the growth groupies out there, COIN did have one spectacular growing number to report. Unfortunately, it was in stock based compensation which is now annualizing to $1.6 billion. COIN Q3-2022 Letter Outlook All other things being equal, Wall Street will be bullish. That truism applies here as well as we look at estimates. Here is a look at the revenue estimates for 2022 to 2024. We have circled the average and the low-end numbers. Seeking Alpha-COIN The consensus has basically gone "this is a one-off quarter, and revenues will rebound strongly in 2023." That is what they are saying considering that COIN's last quarter was at a $2.2 billion annualized run-rate. At the low end we have some who are annualizing the last quarter run-rate. The reality is likely to be far more grim. Q3-2022 was just the tip of the cryptocurrency implosion and volumes dropped so much. Q4-2022 is where all the good things happened as Sam Bankman-Fried's assets got deep fried from $11 billion to zero as FTX went under . We think it is sheer insanity to assume that there is going to be more capital to trade these "instruments" in 2023, but that is exactly what analysts are forecasting. Our take here is that we will see a $350 million quarterly run-rate in 2023, leading to $1.4 billion of revenues. That is our absolute best-case scenario. Even at that level, stock-based compensation will be higher than revenues. Based on the operating expense run-rate, which COIN has made a zero effort to pull back to date, we see losses in the order of $3-$4 billion in 2023. Forecasting exact losses per share will be difficult. COIN's share count is the only thing that is growing and we expect that to accelerate in 2023. Data by YCharts But roughly we think losses per share will be in the range of $16-$19 for 2023. Of course, in line with the optimism on revenues, Wall Street analysts are telling you that it will be just a little prick. Seeking Alpha-COIN Well, you know our outlook and we are happy to compare notes in a year. We think things will blow up spectacularly as everyone suddenly realizes that we are still searching for the first real use for cryptocurrencies. Verdict As we see the trajectory to single digits that we spoke about in August, two things give us pause. The first being that the stock is very oversold on shorter time frames. Even COIN's 200 day moving average is more than twice the current price. Data by YCharts The other point is that short interest hit a new high recently. Data by YCharts So anyone taking a short sale risk here has to be aware that you can get demolished when points 1 and 2 combine. That said our call is for the next 12 months and we think that COIN will continue its journey down. Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
