Direct listings are something of a rage on Wall Street these days.
The avoid things like setting the IPO price, leaving money on the table and closing below the offering price (breaking).
But what a difference a year (almost) can make.
Take Coinbase (COIN) , for example. The shares closed at $328.28 in their Nasdaq debut last April 14. At that price, the company was carrying a market cap of $85.8 billion.
Fast forward 11 months and the stock is about 40% below that.
Real Money's Paul Ginesin has a theory about Coinbase, specifically, and IPO stocks in general.
“Investors are often seduced into buying hot IPOs of companies with new business models that show signs of hyper-growth,” Ginesin wrote on Real Money. “However, when they come public, it's often hard to discern if the IPO coincides with the exact moment when growth is at its peak or if growth is enduring. Wall Street usually chooses the latter and extrapolates growth well into the future.”
That can be a problem. "When COIN shares came public last April, earnings and revenue were growing so rapidly that analysts had price targets equivalent to the value of Goldman Sachs,” Ginesin said. “Revenues soared from $190 million in 2020 to $1.8 billion in 2021. Yet, it's become clear that Coinbase had been over-earning last year, with 2022 revenue expected to be down and earnings far lower than 2021.”
Before the company's latest earnings report, "EPS was already expected to decline in 2022 to $7.20, but with new ramped-up expenses and lower trading volumes, Wall Street now expects 2022 EPS below $4 per share -- down from $14.50 reported in 2021," Ginesin wrote.
Good Timing
“In 2021, Coinbase was able to take advantage of market inefficiencies and enthusiasm for cryptocurrencies,” Ginesin added. “The company earned a high take rate on crypto transactions along with other fees and services. But Coinbase's take per transaction has declined significantly from the peak due to more competition and market efficiencies.”
A big part of the problem is with cryptocurrency demand and performance.
Shares of Coinbase are highly correlated with the price of Bitcoin. Even so, Ginesin expects the stock to underperform the cryptocurrency this year due to much higher expenses. Stock-based compensation alone is expected to hit $1.5 billion, almost 4% of Coinbase's market cap.
Granted, crypto markets can possibly accelerate meaningfully this year. Also, Coinbase is diversifying its revenue base with new products and it will benefit from a growing subscription and services revenue. Is that enough for buyers to bite? Not really, Ginesin said.
“With Coinbase's EPS expected to plummet this year to under $4, down from $14.50 in 2021, the company looks to have come public at an optimal time for sellers,” he said.
