Coinbase stock is trading as if the crypto platform 'will burn through all of its cash'

A brutal quarter for Coinbase amid a sharp downturn in crypto prices and trading volumes has only emboldened the bear case on a stock already down 71% on the year.

"With shares of Coinbase Global selling off sharply during today’s trading session and then plunging further following the market close in reaction to the company’s release of a weaker-than-expected 1Q22 report, the stock is trading as if COIN will burn through all of its cash and then become insolvent," BTIG analyst Mark Palmer opined in a new note.

Coinbase stock fell more than 14% in pre-market trading on Wednesday as of 7:31 A.M. ET. The stock is the number one trending ticker on the Yahoo Finance platform.

Coinbase's earnings report showed that sales badly missed analyst estimates by $300 million, monthly transacting users tanked 19.2% quarter over quarter, and trading volumes plunged 44% sequentially.

"While the company’s 1Q22 revenue and monthly transacting users (MTUs) missed consensus estimates and management said they expected even softer results in 2Q22," Palmer added, "in our view those disclosures should not have been all that surprising to anyone who has watched the prices of digital assets decline over the past few months amidst a general decline in the prices of risk assets globally — at least not surprising enough to trigger a 16% decline in the stock during extended trading following a 12.6% decline during the trading day."

Coinbase stated that it will look to manage adjusted operating losses to $500 million this year, which sparked concern over the longer-term health of the business.

CEO Brian Armstrong sought to tamp down bankruptcy concerns — in part fueled by a potential prolonged downturn in crypto — in a Twitter thread after the earnings call.

"There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets," Armstrong stated. "Your funds are safe at Coinbase, just as they’ve always been. We have no risk of bankruptcy; however, we included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties."

Despite the lackluster quarter, Wall Street has generally stayed upbeat on Coinbase.

"Certainly during these next couple of quarters where they're going through a downturn in the crypto market, they're actively investing to diversify their business away from the volatile trading business," MoffettNathanson's Lisa Ellis said on Yahoo Finance Live (video above). "And in our view, that's essential both for the stability and the stock but also just for diversification of the business more broadly that we see that going forward."

BTIG's Palmer argued that insolvency concerns are overblown, adding that the company has a host of catalysts taking shape.

"While we are clear-eyed regarding the potential impact of a severe Federal Reserve tightening cycle and the potential for that cycle to result in an economic recession, we believe the market is pricing in an outcome for COIN that (1) fails to reflect the company’s ample liquid assets, including $6.1 billion of cash and ~$1bn in crypto held for investment, with the cash alone equal to almost one-third of the stock’s market capitalization at today’s market close, and (2) ignores its established leadership within the digital asset space and its multiple avenues for growth, including the adoption of its institutional crypto prime brokerage platform, the growth of its recently launched NFT marketplace, and the potential upside from its staking offering as more investors become aware of the attractive yields it provides," Palmer wrote.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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