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Coinbase: ‘I’ve never been more bearish,’ analyst says

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Dan Dolev, a senior financial technology analyst at Mizuho, explains his bearish sentiment towards Coinbase after the crypto company's disappointing earnings.

Video Transcript

JULIE HYMAN: Coinbase is sinking. The shares right now down 21% after its trading volume in the first quarter fell 44% from the prior quarter. Monthly transaction-- transactional users also falling by 19%. Crypto trading platform blames the usage slump on a weaker crypto market. And the CEO reiterated he has never been more bullish on the company. Joining us now to discuss is Mizuho senior financial technology analyst, Dan Dolev.

Dan, it's good to see you. You're not-- you've never not been more bullish on the company. I don't know if I'm saying that right. Anyway, you have a neutral on those Coinbase shares. And where do you think they go from here? The company talking about trying to broaden its reach, get its users to do other stuff besides just trading on the platform. But it seems like they're going to be in the dumps as long as crypto is.

DAN DOLEV: I agree. Thanks for having me on the show again. Always great to be here. I've never been more-- I mean, to say what-- kind of to paraphrase on what you've said, I've never been more bearish on Coinbase as I am today. We've been bearish, just to remind you. We've been bearish from day one. We've always said this business is not really sustainable because all it is, is just a commission-based business in a market that was overhyped. And then like TD-- like the TD Ameritrade's or Schwab's of the world, over time, commissions go down.

So what we're seeing here, this slump, is even before commissions went down. I mean, to remind you, the take rate on the retail side actually went up slightly because of the mix between pro and non-pro. So imagine what happens when competition heats up and then the take rate. So the next leg to the story and what makes me bearish today is, one, continued degradation of the take rate, which is coming because Crypto.com, some other exchanges, FTX, they're all fighting for market share, and we've seen evidence that Coinbase was losing.

And the second thing-- and that's the biggest story people are missing today-- or probably not today because the stock is down-- is, they're basically telling people there's going to be $500 million loss in EBITDA, and that's pretty realistic. So, you know, they're investing a ton. I hear what Brian Armstrong is saying. But what are they investing it for? Their share-- they're not gaining share. Sometimes they're losing share. And the market looks awful for them. So I think that the cash flow burn is a big story that people should pay more attention to.

BRAD SMITH: Yeah, we heard a lot of conversation on the earnings call about the crypto winter and the acknowledgment of a crypto winter. Can this company, do you think they survive the crypto winter with some of the investments that they've made heavily? And additionally, if you did see a pullback in prices, in volume, what that would mean for Coinbase.

DAN DOLEV: It's a great question. Look, I mean, there are two scenarios here-- a mild winter, which I would put the probability on that at less than 50%, and then some sort of an Ice Age. I would call it more like a crypto Ice Age. And I think if we get into a crypto Ice Age, I think the survivability is much more questionable, I think.

And it doesn't look great, right? You're getting all this forced selling of crypto right now because a lot of it is done on leverage. And then where is the bottom? We don't know. And then the key issue is the retail engagement, right? You had a lot of retail engagement last year. And we're post this post-COVID era. A lot of it is evaporating.

BRIAN SOZZI: Well, Dan, if Coinbase wants to avoid disappearing, whatever that might mean, should they go out and buy Robinhood?

DAN DOLEV: I saw that question on the call. As you know, I'm very bullish on Robinhood. I think the way Robinhood monetizes is much more sustainable. I know that's controversial because of PFOF. I can't comment on any speculation, but I think if they want to survive, they have to diversify away much quicker from the reliance on crypto. So they have to-- I don't know. At this point, I really don't know what they can do to survive. I mean, in my view, my humble opinion, they have to stop hiring aggressively, because those costs are going to haunt them down the road. That, to me, is they have to sort of basically pull the plug on the hire.

BRIAN SOZZI: But Dan, they've given no indications of pulling back on hiring. How big a problem is it? Because that management team, that call-- I don't know how you took it, but I took it, they're just out to lunch, and they're not reading the room right on Wall Street.

DAN DOLEV: I think they're making a big mistake here. I hear you. I mean, this reminds me a little bit of like Thelma and Louise, right, like getting full gas into the cliff. Like, if I were them, I would actually cut back on spend right now because they have to maintain profitability. And I think the market likes companies that are profitable and coming up with a $500 million loss, which is kind of on the table right now. It's not going to be well received. I mean, you're seeing that with this stock decline today.

JULIE HYMAN: Dan, I'm going to be that guy. You don't sound like someone who has a neutral rating and a $135 price target on this company, unless that's changed since I saw that.

DAN DOLEV: No, it hasn't changed. Just to remind you, like, two weeks ago, that was considered very bearish. So the market's moving faster than ever. I think we are-- we've been very, very vocal about our bearish stance. I think that the valuations has come down very dramatically. So I guess this is more just a factor of the market acting-- behaving and the volatility behaving faster than anyone can actually imagine.

BRIAN SOZZI: Yeah, the market isn't--

DAN DOLEV: From an overall perspective, I would tell you, I don't see great things down the road for Coinbase if that's kind of like a--

BRIAN SOZZI: Well, the market looks to be pricing in that scenario. We'll leave it there. Mizuho analyst Dan Dolev, always good to see you. We'll talk to you soon.

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