Goldman Sachs Dumps on Coinbase, Smiles on Robinhood

In a Monday morning research note, analysts at Goldman Sachs have changed their ratings and price targets on two former financial stars: Coinbase Global Inc. (NASDAQ: COIN) and Robinhood Markets Inc. (NASDAQ: HOOD). One received some good news, the other some bad news.

The bad news first. The Goldman Sachs team cut Coinbase from a Neutral rating to a Sell and slashed the $70 price target to $45, citing the current fall in cryptocurrency asset levels and trading volumes that imply even further degradation in the company’s revenue base. The analysts expect 2022 revenue to fall by about 61% year over year, with a larger decline in the second half of the year.

More job cuts also are needed. Coinbase recently announced that it fired approximately 18% of its workforce, but that is not enough because that “merely brings headcount back to end-1Q22 levels and resulted in COIN moving to the low end of its previous expense guidance. We believe COIN will need to make substantial reductions in its cost base in order to stem the resulting cash burn as retail trading activity dries up.”

Adding to the company’s troubles, Coinbase has guided stock-based compensation for the year at $420 million, roughly 42% of Goldman’s estimated 2022 revenues. That means that the company “faces a difficult choice between shareholder dilution and significant reductions in effective employee compensation, which could impact talent retention, in our view.”

Goldman Sachs also warns of fee rate compression, citing Binance.US’s announced plan to cut fees on its exchange. The analysts comment, “[W]e believe this reinforces the bear thesis on fee rate compression over time and likely adds to the longer term concerns around pricing.”

Finally, Goldman’s analysts believe “valuation support is limited as (1) higher revenues in the near term would require higher crypto prices and volatility and (2) we forecast breakeven to negative adjusted EBITDA over the next several years.” That valuation judgment is based on a market cap of around $11.5 billion and net cash of around $3.8 billion, including $1.3 billion crypto assets “where we expect a significant impairment in 2Q based on current prices.”

The better news is that Goldman Sachs upgraded Robinhood stock from Sell to Neutral, while reducing its price target from $11.50 to $9.50. That represents an upside potential of 19% based on Friday’s closing price.

Noting that Robinhood shares have declined by 29% since they put a Sell rating on the stock, the analysts say that at the company’s current valuation of around $6.99 billion, Robinhood is approaching its cash value (of around $6.2 billion), which the analysts see “as a reasonable fundamental floor for the value of the company.”

Robinhood also is expected to benefit from rising interest rates. The analysts expect the company’s “net interest revenues derived from balance sheet cash, margin loans, bank sweeps, and client payables will benefit from incremental rate hikes.” They also expect customer cash balances to grow, offsetting to some degree recent declines in margin balances.

The analysts see three downside risks to this upgrade. First is a declining customer base that could negatively affect the revenue stream. Second is lower trading volumes, which would also reduce revenue. And third is regulation of the company’s payment for order flow model.

Coinbase stock traded down about 8.3% in the first half-hour of trading on Monday, at $57.50 in a 52-week range of $40.83 to $368.90. The consensus price target on the stock is $137.91.

Robinhood stock traded up about 3% to $8.23, in a 52-week range of $6.81 to $85.00. The consensus price target on the shares is $12.89.

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