Coinbase Global stock has been on fire this year, marching almost 300% higher amid regulatory and competitive pressures alike. In the process it has outperformed Bitcoin and punished bearish traders who have lost billions of dollars betting against the shares.
It's no surprise that one analyst who was initially doubtful of Coinbase is taking some time to reflect on his initial thesis. What might be surprising, however, is that he isn't backing down from his Underperform rating on the stock.
"The crypto industry and the backdrop for cryptocurrencies generally has changed meaningfully since Coinbase's mid-2021 IPO, creating outcomes vastly different than was expected at the time," Patrick O'Shaughnessy, an analyst at Raymond James, wrote in a Tuesday note.
A key part of the initial thesis at Raymond James was that Coinbase would face pricing compression over time: The analyst expected that the take rate -- or transaction fees associated with its core crypto brokerage business -- would be pressured by competition.
But Coinbase's average retail take rate has risen to 2.5% in the most recent quarter from 1.2% to 1.3% in June 2021, O'Shaughnessy writes.
"Since our initiation, Coinbase's retail pricing has actually moved higher (and is meaningfully higher than we otherwise would have expected)," he added.
One reason for that, he says, is an encouraging shift in Coinbase's customer base: As traders fled crypto amid the 2022 bear market, Coinbase held on to the retail crowd, which pays higher fees. While Coinbase does face competitive pressures -- including from retail-focused broker Robinhood Markets -- the devastation across crypto has seen multiple rivals fall, including FTX.
"We believe this favorable competitive environment has allowed Coinbase to modestly raise pricing on its retail platform rather than defend market share via price reduction," O'Shaughnessy wrote.
Another thing Raymond James says it got wrong -- at least so far -- was the risk that the stablecoin Tether -- the most dominant dollar-pegged token -- posed to the crypto ecosystem. Given the systemic role of stablecoins in the digital asset economy and Tether's mixed record of transparency, there was a concern that a failure at Tether could damage the whole space.
"Despite concerns over asset backing, Tether has remained largely resilient over the past few years," O'Shaughnessy wrote.
Raymond James wasn't bearish on everything in 2021 -- in fact, they were positive about the broker's opportunities in subscriptions and services. Coinbase has experienced tailwinds in this business, but from an unexpected place: Holdings of the dollar-pegged USDC stablecoin has seen interest income surge in step with rising interest rates.
"The success of Coinbase's interest income line has offset a lot of the pressures the firm has seen in other areas of its business such as lower transaction volumes," O'Shaughnessy wrote. That makes Coinbase "look more like a bank," with 30% of its revenue generated from interest income, he added.
But Raymond James wasn't all wrong on all aspects of its bearish stance, and continues to double down on it. O'Shaughnessy still views the regulatory backdrop as unfavorable for Coinbase. That backdrop has shifted from patchwork guidance in 2021 to more aggressive enforcement actions against crypto firms from the Securities and Exchange Commission -- which targeted Coinbase this year -- and other agencies.
"The SEC has continued its pursuit of potential securities violations within the cryptocurrency industry," O'Shaughnessy wrote. "An SEC victory over Coinbase could have several long-term financial impacts."
It's true that Coinbase faces an existential threat to its core trading business from its battle with the SEC, which alleges that it operates as an unregistered securities exchange. Coinbase has maintained that it doesn't offer unregistered securities and is committed to fighting the allegations in court. So far, the broker has earned a reputation as a survivor in a chaotic industry, helping it be viewed as a blue-chip crypto play and no doubt contributing to its astonishing stock-price rally in 2023.
Nevertheless, there remains a compelling case to sell Coinbase stock, especially at these lofty price levels. Raymond James, for its part, also can't look past a more philosophical pessimism -- the idea that, ultimately, crypto is mostly useless, and this may be a barrier to Coinbase's longer-term success.
"Despite the collective efforts of an untold number of people over the past 15 years, in our view the world has yet to find meaningful, societally-beneficial use cases for cryptocurrencies and the underlying blockchain technology," wrote O'Shaughnessy.
Coinbase investors sitting on big gains this year probably aren't too worried about that, though.
