Coinbase Global stock price jumped 6 percent on Friday and the price currently hovers around 52-week high for the stock. The recent gains for Coinbase stock have been largely due to renewed buying interest in cryptocurrencies. On Friday, Bitcoin touched all-time high and other cryptocurrencies were also trading strong. Some of the altcoins were trading near their all-time highs. Coinbase gains as trading activity in cryptocurrencies grows with stronger price. However, Morningstar research has suggested SELL Call for Coinbase stock. For many investors, the target price could seem too low, considering the rising interest in cryptocurrency trading but Morningstar team has given strong reasoning for suggesting SELL trade for Coinbase Global. The target price has been raised from earlier Call but SELL remains as the idea from Morningstar team. Investors should not forget that yearly low for Coinbase stock is $88.63. The detailed research report follows...

Morningstar has reiterated a “SELL” call on Coinbase Global Inc. (NASDAQ: COIN), suggesting that the stock, currently priced at $270.74, is overvalued compared to its fair value estimate of $150. This view, based on a valuation model updated following Coinbase's third-quarter earnings, points to an overvaluation by 80% against its projected intrinsic value. Despite a revenue boost from its cryptocurrency staking business and regulatory shifts likely to favor the crypto industry, Coinbase faces substantial regulatory, operational, and market risks.

Key Takeaways for Investors

Overvaluation Despite Fair Value Adjustment
Morningstar increased Coinbase’s fair value estimate from $135 to $150, reflecting higher growth expectations in its staking business. However, at a Price-to-Fair-Value (P/FVE) ratio of 1.8, the stock remains substantially overvalued, given the current trading price of $270.74.

Regulatory Environment and Presidential Influence
The incoming administration is anticipated to take a more lenient approach toward cryptocurrency regulations, particularly in areas like Coinbase’s staking business, which has faced legal challenges from the SEC. A reduction in regulatory pressures could accelerate growth within this segment, though Morningstar cautions that regulatory clarity is still a long-term concern.

Financial Performance and Revenue Structure

Revenue Dependence on Trading and Interest Income
Coinbase's revenue model is heavily reliant on trading fees and interest income from its partnership with Circle for the stablecoin USDC. Transaction fees make up a large portion of income, and the platform’s trading volume is directly tied to cryptocurrency market activity, making Coinbase highly sensitive to market volatility.

Staking Revenue Outlook
Following the third-quarter earnings release, Morningstar projects moderate revenue growth in Coinbase’s staking services, bolstered by anticipated regulatory relief. However, the positive revenue impact from staking is somewhat offset by increasing operational costs, which Morningstar incorporated into its revised valuation.

Risks and Uncertainty

Uncertain Regulatory Landscape
Coinbase’s ongoing legal battles with the SEC create substantial uncertainty. The firm faces allegations of listing unregistered securities on its platform, a challenge that could lead to operational shifts if adverse rulings force Coinbase to delist certain assets. Regulatory clarity remains a critical factor in Coinbase’s future, and a favorable or unfavorable ruling could significantly impact both operations and valuation.

Market Volatility in Cryptocurrency
As a predominantly transaction-based platform, Coinbase is exposed to the cyclical nature of cryptocurrency prices, which are speculative and prone to sharp fluctuations. Morningstar cites the volatility of cryptocurrency as a core risk factor that could lead to earnings unpredictability and high investor risk.

Investment Evaluation and Competitive Landscape

Fair Value Relative to Key Competitors
Coinbase’s economic moat is rated as “None” by Morningstar, indicating limited competitive advantage relative to traditional financial exchanges like CME Group and Intercontinental Exchange, both of which have wide moats. Coinbase’s fair value estimate positions it unfavorably compared to these established players due to its high dependency on speculative assets and regulatory overhang.

Cryptocurrency Custodianship and Liquidity Pooling
The custodial model Coinbase employs, keeping client assets on its platform to ease transaction liquidity, does create an implicit liquidity advantage. However, with increased regulatory scrutiny, the sustainability of this model remains in question. Additionally, while Coinbase’s reputation as a safe exchange attracts retail users, this factor may not be enough to secure long-term market leadership.

Capital Allocation and Financial Stability

Strong Balance Sheet but Exposed to Crypto-Asset Volatility
Coinbase’s balance sheet remains robust, with over $7.2 billion in unrestricted cash and over $2 billion in cryptocurrency assets. While this capital reserve bolsters its financial position, Morningstar points out the risks of carrying substantial cryptocurrency assets when the company’s business model is already highly sensitive to crypto market fluctuations.

Standard Capital Allocation Rating
Morningstar rates Coinbase’s capital allocation as “Standard.” The company’s strategy of not issuing dividends or repurchasing shares is deemed appropriate given the volatility of its core assets. Rather than dividend payouts, Coinbase is focused on acquisitions to expand its ecosystem within the cryptocurrency space, a choice Morningstar supports for its potential to diversify income sources over time.

Valuation Analysis and Price Targets

Coinbase’s fair value estimate of $150 translates to a Price-to-Earnings (P/E) multiple of approximately 27x projected earnings for 2024, reflecting higher growth in revenue from trading fees and interest income. Morningstar’s projections indicate the following:

Expected Revenue Growth: Higher revenue growth in staking and trading segments is anticipated, but growth is limited by rising operational expenses.
Long-Term Fee Compression: As cryptocurrency markets mature, Coinbase is likely to face fee compression due to competition, although it may sustain premium fees in the short term given its reputation.
Interest Income: Expected to grow modestly at a compound annual growth rate (CAGR) of 3.5% over the next decade, interest income remains a secondary yet critical revenue source.

Market Outlook and Recommendation

SELL Recommendation and Price Outlook
Morningstar’s “SELL” recommendation underscores the risk of Coinbase’s current valuation. The stock is projected to face downside risk as regulatory scrutiny continues and the inherent volatility of cryptocurrency impacts earnings stability. A fair value estimate of $150 implies that investors may see improved value by waiting for a price correction closer to this target.

Investment Risks to Monitor
Investors considering Coinbase should account for the following risks:

Regulatory Pressures: Continued scrutiny by the SEC and potential rulings regarding asset registration.
Crypto Market Volatility: Sharp fluctuations in cryptocurrency prices can significantly impact revenue and investor sentiment.
Operational Costs: Rising operational expenses may strain profitability despite anticipated revenue growth.
Disclaimer: This report presents an overview based on Morningstar’s analysis of Coinbase’s recent performance and market outlook. Investors are encouraged to perform their own due diligence and consider their risk tolerance before making investment decisions.