over 2 years ago • 3 mins
There’s an indirect way to play the crypto craze: buying into newly listed cryptocurrency exchange Coinbase. And with investment banks Goldman Sachs and JPMorgan both publishing their initial views on the stock last week, now’s a good time to weigh up the pros and cons of doing so.
Coinbase’s easy-to-use app offers a welcoming way for people to get started buying and selling cryptocurrencies. As more people become crypto-curious, Coinbase’s go-to status should see it grow its user base. And as those investors become more confident, Coinbase aims to upsell them more lucrative products.
Coinbase had 6.1 million “monthly transacting users'' at the end of last quarter – more than twice as many as three months before. Even if growth now slows to as little as 20% annually, Coinbase should – partly thanks to its “on-ramp” characteristics – be able to sustain high revenue growth. After all, it can always hike fees on existing customers. And since most of Coinbase’s costs are fixed, rising revenue should mean rising profit.
Coinbase already offers custody (i.e. wallet) and staking services, but the company’s focus so far has been on selling those services to institutions rather than retail customers. Expanding its target audience there – as well as for lending and perhaps even payments services down the line – should open up new revenue opportunities.
Cryptocurrencies’ conflict with governments’ monopoly on means of exchange within their economies could lead to regulation that damages the industry – and Coinbase with it. Despite recent positive progress in the US, decentralization-sapping reforms and even outright crypto bans remain a possibility in some parts of the world. There are also major outstanding concerns regarding crypto’s legal status determining what protections investors are – and, crucially, aren’t – afforded, as well as worries about the potential for criminal money laundering.
Hacking is a risk for any digitally native platform. But when that platform houses $223 billion worth of assets, it arguably becomes its single greatest risk: given the immutable nature of blockchains, it’s nigh-on impossible to recover stolen crypto. A Coinbase hack could irreparably damage confidence in the company and impair its ability to grow users as fast as hoped.
While many might jump for joy on the day cryptocurrencies are considered “low-volatility”, Coinbase isn’t among them. High volatility encourages users to trade: a price chart gently trending up or down isn’t as exciting as one darting around violently. If Coinbase’s users aren’t motivated to trade, they’ll probably pay fewer fees to the exchange – and that’ll hurt earnings.
Putting all the above together, investment bank analysts have come out pretty positively on Coinbase’s stock. Goldman Sachs has a 12-month price target of $306, implying a 28% potential upside from the stock’s June 1st price. Rival bank JPMorgan has a price target of $371 per Coinbase share – implying potential upside of 55%. Investment firm Oppenheimer, meanwhile, has a 12-18 month price target of $434, implying 82% potential upside.
Of course, Coinbase’s shares are currently some 37% below the price at which they hit the stock market. A pessimistic way to interpret those price targets is that neither Goldman or JPMorgan believe the stock’s worth its initial price at present – but the main takeaway for me is that, having fallen, the balance of reward to risk is skewed in favor of buying the shares for now.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.