Coinbase: Bears Out In Full Force

Summary Bitcoin trading volumes are not looking good. Another round of job cuts brings up the profitability question. Short interest hits a new high at the end of 2022. Despite being up almost 39% from its recent all-time public trading low, shares of cryptocurrency trading platform Coinbase ( COIN ) have still lost more than 80% of their value over the past year. As many digital currencies saw huge plunges in their trading prices, the company saw its revenues fall, profits swing to losses, and cash flow turns to cash burn. A couple of weeks into the new year, shares have recently spiked, but there are lots of reasons why the bears remain here. This week, Coinbase announced a second round of job cuts , with roughly a quarter of its workforce being dumped. While management reaffirmed some of its previous guidance for 2022, it has become clear that the expense base here was just too high. Adjusted EBITDA for last year is still supposed to be around negative $500 million, but hopes are that this number could improve a bit this year as the crypto space rebounds and expenses are trimmed in a meaningful way. In a note out a few days ago, an analyst at Bank of America ( BAC ) detailed how Coinbase trading volumes are estimated to be rather low currently . Citing CoinGecko data, the analyst said that the trading platform's volumes for December, the first full month after rival FTX (FTT-USD) imploded, were less than half of its Q1-Q3 monthly average of around $76 billion. As I mentioned in a previous article, the FTX contagion was likely to spread , and there have been a lot of worries over multiple players in the space going bankrupt in recent months. In the chart below, you can see average daily Bitcoin (BTC-USD) trading volumes per quarter over the past two years. Bitcoin Quarterly Trading Volume (Yahoo! Finance) For the first 10 days of January, Bitcoin trading volume is down almost 50% as compared to the first 10 days of October. Some might suggest this is due to seasonality and the holidays, but the fall is well over 60% if I compare trading volumes to the first 10 days of 2022. One might think that the fall in Bitcoin would lead to more overall trading, as we sometimes see with lower-priced stocks, but that certainly isn't the case here. Other than companies that are legitimately on the verge of bankruptcy, there aren't too many names seeing analyst estimates come down this much right now. In the table below, you can see how the Street has significantly reduced its revenue estimates, even just in the past month. For this five-quarter period, the combined topline number has nearly been sliced in half since that late June date, with the percentage drop being even higher for many of the 2023 periods. Coinbase Revenue Estimates (Seeking Alpha) If you look at the annual estimates on certain sites, you might find some slightly different numbers due to a different amount of analysts providing full year vs. quarterly figures. If you total up the four 2023 quarters above, the total revenue number has come down by $600 million in the past month. Even with the significant job cuts, we are likely to see more losses coming, when you consider in Q3 that total operating expenses for the company were nearly $1.15 billion in that one quarter alone, and that didn't include interest or other expenses further down the income statement. In my previous article on the name, I mentioned how short interest in Coinbase had hit a new all-time high . We received the end of December update on short interest on Wednesday, and it turns out that the previous record has again been eclipsed. Another 4.34 million shares were shorted in the final month of 2022, ending the year's dramatic surge seen below. Coinbase Short Interest (NASDAQ) Unlike my previous update, however, the dollar value of shares short did actually decline. That's only because shares lost almost a quarter of their value in December. With roughly 26% of its reported float short , Coinbase remains one of the most shorted large-cap names in the market today. I wouldn't consider the name a major short squeeze candidate at the moment, though, just because the days to cover ratio is a little less than 3. That means it would only take about 3 days' worth of average trading volume for all shorts to exit, whereas I look for major short squeeze names where that ratio is in the high single digits or sometimes even double digits. Coinbase shares closed at $43.79 on Wednesday. While in percentage terms there has been a significant bounce from the recent $31.55 low, the stock remains at a small fraction of its public trading peak that came near $369. I keep mentioning about the decline in the street's average price target , and that figure is down another $11 since my previous article. At a $60 average, there's still a significant upside according to analysts, but they also saw this name as worth more than $375 just a year ago as a point of reference. Thursday's CPI report could have a huge impact on Coinbase shares, as a big market move in either direction could lead to a nice rally or a big fall. A volatile name like this would certainly benefit if the Fed changes course and really slows its tightening monetary policy stance this year, which likely would benefit the crypto space. One thing that I'll be watching closely is if the stock does decline, because it closed Wednesday just below its 50-day moving average (purple line) seen in the chart below. If Coinbase stays under this important technical line, which is currently trending lower, we could see more pressure on shares in the near term. A decent rally, however, could get the 50-day to level off and perhaps move higher, which might cement this breakout for at least a few weeks. Coinbase Last 6 Months (Yahoo! Finance) In the end, the bears continue to be out in full force regarding Coinbase. The company announced another large round of job cuts this week, only increasing recent concerns about profitability and cash flow. Crypto trading volumes aren't doing great, especially since the FTX blowup, and analysts continue to cut their revenue estimates and price targets. While shares of this name could do quite well if the Fed has to back off on its tightening plans for this year, the recent sharp rally could evaporate very quickly if the status quo remains and confidence in the overall crypto space continues to dwindle.