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Editor's Note: Soon after the publication of this video, on Tuesday, June 14, Coinbase chief executive Brian Armstrong announced the company was reducing its staff headcount by 18%, citing the likelihood of a recession and resulting "crypto winter".
"We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period," he told employees in a memo.
Morningstar assigns Coinbase shares a fair value of US$131, implying a substantial uplift from current levels, but its Uncertainty Rating is "very high". And for good reason.
"As we operate in this highly uncertain period [...] we want to ensure we can successfully navigate a prolonged downturn. Our team has grown very quickly (>4x in the past 18 months) and our employee costs are too high to effectively manage this uncertain market. The actions we are taking today will allow us to more confidently manage through this period even if it is severely prolonged." Affected staff were immediately frozen out of the company's internal systems.
We will update this piece as more information becomes available.
Andrew Willis: Coinbase (COIN) has been a market leader in the crypto exchange space with a strong reputation, good regulatory compliance and a track record as a custodian. That’s allowed it to command transaction fees above many peers.
To get to where it is today, the company has had to be innovative, fulfilling multiple roles in the trading ecosystem: acting as an exchange, asset custodian and broker – all in one… Much unlike many traditional stock exchanges.
The fundamental core aspect that current and potential investors need to keep top of mind is that the platform is closely linked to the underlying assets being exchanged – and their volatility – which has become clear with the fall of crypto assets like Bitcoin roughly halving in value since the peaks of last November.
Equity analyst Michael Miller explains there’s a strong correlation between Coinbase’s trading fee revenue and the size of the cryptocurrency market, and if crypto should prove not to be a durable asset class, it’s unlikely that Coinbase’s business would be able to retain much if any value.
With a year-to-date loss of more than 70% as of the beginning of June, Coinbase is outpacing bitcoin’s losses. That involves adding fuel to the fire of uncertainty by blending a business, with spending and margins to consider, with the volatility of what is essentially a crypto bet.
For Morningstar, I’m Andrew Willis.
Editor's Note: All images are courtesy of Unsplash.com and AP Images.
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