Coinbase: Overvalued Into Earnings As Bitcoin Headlines Dip, Key Support Spotted

Summary Coinbase's stock has drifted lower despite strong inflows into cryptocurrency, signaling a potential buying opportunity if the stock moves further into key support. Analysts expect Coinbase to report better earnings in the quarter just ended, though I see sales growth as somewhat modest over the coming years. I see the stock as mildly overvalued based on its price-to-sales ratio both compared to its historical average and its exchange-company peers. Ahead of earnings next week, I outline key price levels to watch on this high-volatility stock. Crypto has been a bit of a sleeper since 11 Bitcoin ETFs hit the tape in January. The largest cryptocurrency, Bitcoin, has ranged between about $38,000 and $45,000 in recent weeks as the euphoria that came alongside the ETF launches subsides. Shares of Coinbase (COIN), however, have drifted lower as the media has moved on to other issues. Still, inflows into cryptocurrency continue to be generally strong, offering some fundamental hope for the world's most prominent cryptocurrency online platform for retail investors. Another Big Weekly Crypto Inflow Coinshares According to Bank of America Global Research, Coinbase is a leading global crypto provider of end-to-end financial infrastructure and technology. The company has 4,510 employees as of December 2022 and provides a wide range of crypto-native products, services, technology, and infrastructure to over 110M verified users, 9,000+ institutions, and 160,000+ ecosystem partners in over 100 countries. During 2022, COIN processed over $830B in trading volume and generated $3.19B in total revenue. The $29 billion market cap Financials sector stock reports earnings on Thursday next week. Data from Option Research & Technology Services (ORATS) show an expected stock price move of 10% when assessing the current at-the-money straddle expiring soonest after the reporting date - that is significantly more than the two previous actual moves. So, I would be inclined to sell some of that volatility this go around. Non-GAAP EPS is expected to come in at $0.02, which would be a very positive move from -$2.46 of per-share operating losses reported in the same quarter a year ago. Also an encouraging sign, the company has topped estimates in each of the past four quarters, though shares have traded higher post-earnings in just two of those instances. Overall implied volatility is high at 79% and short interest on the stock is material at 8.5% as of February 7, 2024. COIN: A 10% Implied Stock Price Swing Post-Earnings ORATS On valuation , analysts at BofA see earnings continuing to run in the red through this year. Per-share profits are expected to turn positive, albeit by just a few pennies, in the out year. The current consensus outlook, per Seeking Alpha, calls for a penny of operating EPS in the year that has just started and $0.06 of EPS in 2025. Sales growth is forecast to be stout this FY at 15.4% but then slow to just 6.8% next year. With no dividends expected over the coming quarters and low free cash flow, I am rather unimpressed with the profitability trajectory. Coinbase: Earnings, Free Cash Flow, Valuation Forecasts BofA Global Research If we assume $3.45 billion of net sales over the next twelve months and apply a price-to-sales ratio near 7, above that of some of its exchange peers, then the market cap valuation should be near $24 billion, or about 15% to 20% under the latest closing share price. So, I see the stock as overvalued today. Also consider that COIN's long-term average P/S multiple is just 5.5. COIN: Expensive Price-to-Sales Ratio Seeking Alpha Compared to its peers , COIN features a weak valuation grade while its growth outlook is less than attractive. Other, more stable exchange-company peers feature better fundamental metrics. Still, COIN is profitable, but much depends on crypto's uncertain outlook to drive profitability trends. EPS revisions are solid, though, so if we see a positive earnings report next week, there is positive headline risk. Finally, share price momentum is rated well , but I will highlight a few problems I spot on the technical chart later. Competitor Analysis Seeking Alpha Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2023 earnings date of Thursday, February 15 AMC with a conference call immediately after the numbers hit the tape. You can listen live here . Corporate Event Risk Calendar Wall Street Horizon The Technical Take With shares pricey ahead of earnings, the chart has downside risks in my view. Notice in the graph below that the stock features long-term support in the low to mid-$80s. That's where the rising 200-day moving average comes into play, where the range-highs from September 2022 through March 2023 lie, and where an uptrend support line off the $32 late 2022 and early 2023 low currently resides. Thus, I think a test of that level is definitely in play around earnings this month. COIN fell below its shorter-term 50-day moving average earlier this year and the RSI momentum oscillator at the top of the graph has turned much weaker after hitting technical overbought conditions during the frenzy of a rally that took place in the final two months of last year. Moreover, with a high amount of volume by price starting near $85, there should be significant support there. Thus, a 'buy the dip' strategy with COIN makes sense technically and aligns with the fundamental valuation target I have. Overall, COIN's chart points to further downside, but a solid layer of support warrants stepping into the stock from the mid-$90s down to the mid-$80s. Upside resistance is seen between $205 and $220. COIN: Key Support $85 to $90 Stockcharts.com The Bottom Line I have a hold rating on COIN. I see shares as a bit overvalued, but not egregiously so. The chart also offers some hope for the bulls, particularly if we see a post-earnings pullback to under $100.