Goldman Sachs (GS) cut Coinbase’s (COIN) rating to “sell” from “neutral” and slashed its price target to $45 from $70, the bank said in a report on Monday.
- The downgrade was due to the continued fall in crypto prices and the ensuing fall in industry activity levels, Goldman said. Coinbase shares dropped 5.7% to $59.40 in premarket trading.
- In the same report, the Wall Street giant upgraded Robinhood Markets (HOOD) to “neutral” from “sell” with a $9.50 price target. Robinhood shares rose 2.6% to $8.21 in premarket trading.
- Current digital asset levels and trading volumes imply “further degradation” in Coinbase’s revenue base, which Goldman sees falling around 61% year on year in 2022 and about 73% in the back half of the year.
- While Coinbase recently announced a notable restructuring, which involved laying off 18% of its workforce, the bank says further cuts are needed.
- Coinbase will need to make substantial reductions to its cost base to “stem the resulting cash burn” as retail trading activity slows down, the note said, adding that the company faces a difficult choice between shareholder dilution and significant reductions in “effective employee compensation,” which may have a negative impact on talent retention.
- Goldman is more bearish on the competitive environment and the outlook for fee rate compression given the announced merging of Coinbase and Coinbase Pro platforms, which has the potential to reduce the switching costs and make lower pricing more available to users.
- With Coinbase trading with a market cap of around $11.5 billion relative to its almost $3.8 billion net cash position as of the first quarter 2022, the bank sees limited valuation support as higher revenues in the short term would require higher cryptocurrency prices and volatility, and it forecasts breakeven to negative adjusted Ebitda over the next several years.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
