The biggest story in crypto currencies right now is Jim Chanos shorting Coinbase (COIN).
FYI – I own Coinbase so I definitely have a dog in this fight.
Chanos said this:
“We basically think Coinbase is overearning… if you look at comparable kinds of exchanges or trading operations,” Chanos added.
Increasing competition in the crypto industry means the company would have to cut its fees, he said, and added “as it is, Coinbase will probably not be profitable this year.”
And this morning, US Tiger Research analyst Bo Pei initiated Coverage on Coinbase with a Sell rating and $135 target.
Pei said “Despite being an exchange, COIN’s business relies on acquiring new retail users, making it comparable to consumer-facing FinTech companies.”
Here’s my issue with both Chanos and Pei’s bearish takes.
Coinbase last reported earnings on February 24.
So it won’t report earnings again until around May 24. That means there’s no earnings risk for almost two months. We’ll talk more about earnings down below.
But for now, it’s obvious that if Bitcoin and other crypto currencies keeps rising, Coinbase will keep going up too.
Look at the chart of Bitcoin now:
It’s on an upswing.
And since Coinbase stock rises whenever Bitcoin rises, why would you short Coinbase unless you thought Bitcoin would crash? It makes no sense.
Chanos and other Negative Nancy’s believe Coinbase’s fat profit margins will come under pressure over time as commission rates fall and more competition enters the space.
Now, it is true that Coinbase seriously overcharges customers to execute trades. Since I have a Coinbase account, I know this from personal experience. The commissions are outrageous.
But those fat commission rates may stay elevated longer than Chanos and other bears think.
Coinbase has a HUGE branding advantage. Most mainstream investors do not trust crypto currencies, and Coinbase has carved out a reputation as one of the primary mainstream names.
That’s why Coinbase is the first stop for many people as they enter the crypto markets.
PLUS… think about the stock brokerage industry.
In 1975, the SEC banned securities exchanges from fixing commission rates.
The result: commission rates dropped like a rock.
And in 2022, many people trade for FREE through Robinhood, Webull, and other apps.
Yet… the brokerage industry has soared.
Look at this monthly chart of Charles Schwab going back to 1990:
Commissions have gone down but Schwab’s profits have gone way up.
Why? Because the industry has grown.
Coinbase could experience the same exact thing.
Now let’s go back to the earnings question.
First, analysts have no freaking idea of how to predict Coinbase’s earnings.
In the past four quarters, Coinbase has beat earnings expectations by an average of 51%.
Analysts currently estimate Coinbase will earn $14.50 per share this year.
But depending upon how the crypto markets act, that number could be $20 or $25 a share. And then you can easily make a case for Coinbase going to $400 or $500.
In this ape’s eyes, the biggest risk to Coinbase is the mainstream brokers like Schwab and Fidelity getting into the crypto game in a serious way.
So unless Bitcoin breaks down, I’m staying long Coinbase.