JPMorgan: Coinbase’s short-term outlook is “still bleak”

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by Will Canny, Fortune

Coinbase is well positioned to successfully weather the upcoming “winter” in the cryptocurrency market and take market share, Bank of America said in a report on Tuesday. In addition, it maintained its buy recommendation after the second-quarter results.

The results warrant “an implied equity reaction,” the report said. Net income of $803 million was below bank and broader market estimates, while adjusted losses of $151 million before interest, taxes, depreciation and amortization were better than expected. Importantly, the company remains “cautiously optimistic” that it can meet its target of not exceeding $500 million of adjusted PFA losses for the full year, the report added.

Shares of Coinbase fell nearly 8% in early trading to $80.74.

Bank of America notes that Coinbase had no exposure to the defaults in the cryptocurrency market seen in the second quarter. The company also has “a history of no credit losses from financing activities, maintains customer assets at a 1:1 ratio, and any cryptocurrency lending activity by customers is at the discretion of the customer, with 100%+ required collateral.” These rigorous risk management practices will be a “positive long-term diversifier” for the stock, the bank said.

JPMorgan said Coinbase had endured another tough quarter while noting some positives.

Trading volume and revenue fell significantly. Subscription revenue was also lower, but would have been much worse had it not been for higher interest rates, it said in a research report on Wednesday.

The company is taking steps to manage costs and in addition to reducing staff in June, is curtailing marketing and discontinuing some product investments, the note said.

The bank says the company’s near-term outlook is “still bleak,” noting that the company expects continued declines in monthly trading users (MTUs) and transaction volumes in the third quarter of 2022, but says Coinbase could take more “cost-cutting measures” if cryptocurrency prices fall further.

JPMorgan is less optimistic than Bank of America about the company in the short term, saying the pressure on revenues from falling cryptocurrency markets will have a negative impact on the share price. However, it sees some positives, including higher interest rates, from which the company will generate revenue. It also sees opportunities to grow its user base by leveraging nearly $6 billion in cash. Rising cryptocurrency prices in July and the upcoming Ethereum merger are also seen as positive catalysts, he added.

The bank maintained its neutral rating on the stock and raised its price target to $64 from $61.

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