Investors are often seduced into buying hot IPOs of companies with new business models that show signs of hyper-growth. However, when they come public, it's often hard to discern if the IPO coincides with the exact moment when growth is at its peak or if growth is enduring. Wall Street usually chooses the latter and extrapolates growth well into the future.
This was the case with Robinhood (HOOD) , which I addressed in a November article. After the financial services company reported third-quarter earnings, it seemed apparent its revenue growth would soon turn sharply negative, meaning they had come public at an auspicious time to sell out of the shares rather than buy in. HOOD subsequently fell 70%.
Now, let's examine Coinbase Global (COIN) , the cryptocurrency exchange and infrastructure company.
When COIN shares came public last April, earnings and revenue were growing so rapidly that analysts had price targets equivalent to the value of Goldman Sachs (GS) . Revenues soared from $190 million in 2020 to $1.8 billion in 2021. Yet, it's become clear that Coinbase had been over-earning last year, with 2022 revenue expected to be down and earnings far lower than 2021.
Before last week's earnings report, EPS were already expected to decline in 2022 to $7.20, but with new ramped-up expenses and lower trading volumes, Wall Street now expects 2022 EPS below $4 per share -- down from $14.50 reported in 2021.
In 2021, Coinbase was able to take advantage of market inefficiencies and enthusiasm for cryptocurrencies. The company earned a high take rate on crypto transactions along with other fees and services. But Coinbase's take per transaction has declined significantly from the peak due to more competition and market efficiencies.
Investment firm Needham & Co. commented post-earnings, "Given Coinbase transactional revenue is highly sensitive to retail sentiment, we are especially concerned that retail interest in crypto assets may be lower in 2022 than 2021 on the back of lower price momentum in underlying crypto assets. We are lowering our 2022FY revenue estimates from $8.38Bn to $6.77Bn given increased headwinds around crypto asset price activity, increasing competition from crypto native exchanges in US markets, and increasing uncertainty related to rising interest rates, and growing geopolitical and economic concerns which could dampen crypto activity."
Coinbase is the industry leader for all things crypto for retail and institutions. However, financial firms dependent on transaction revenue spurred by uncertain market dynamics receive lower stock price multiples to earnings. Goldman Sachs, for instance, trades with a P/E of 8 on their $15 billion of expected net income, valuing the company around $120 billion. In 2022, Coinbase is expected to earn just under $1 billion, down from $3.5 billion in 2021, with a current market cap of around $41 billion.
Shares of Coinbase are highly correlated with the price of Bitcoin, still, I expect the stock to underperform the cryptocurrency this year due to much higher expenses. Stock-based compensation alone is expected to hit $1.5 billion, almost 4% of Coinbase's market cap.
Granted, crypto markets can possibly accelerate meaningfully this year. Additionally, Coinbase is diversifying its revenue base with new products and it will benefit from a growing subscription and services revenue. However, with Coinbase's EPS expected to plummet this year to under $4, down from $14.50 in 2021, the company looks to have come public at an optimal time for sellers.
The crypto firm impressed Wall Street with massive growth after its public listing, only to reverse the trend with profits down meaningfully this year. Investors are taking a leap of faith that Wall Street will maintain a premium multiple, while risking significant downside in the shares.