New Coinbase Price Target as Move Brings Huge Implications for the Stock
Things are about to change for the cryptocurrency exchange. Here's how I'd play the shares, a favorite among retail investors, as a key date approaches.
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I've been waiting here to be your guide
So come
Reveal the secrets that you keep inside
Step up
No one leaves until the night is done
The amplifiers start to hum
The carnival has just begun
You're in the psy
You're in the psycho circus
You're in the psy
You're in the psycho circus
And I say "Welcome to the show"
- "Psycho Circus" Stanley, Cuomo (KISS), 1998
The call came on Thursday evening, after the closing bell had rung for the final time. The regular trading session had ended for the day. Some ball-players toil away in the minors for years before getting the call. Others, in fact, most, never get that call.
On Thursday evening, cryptocurrency exchange Coinbase Global COIN got that call. Coinbase will be added to the S&P 500 on May 19, replacing Discover Financial DFS, which has agreed to be acquired by Capital One Financial COF. That deal is expected to be completed shortly.
This move by S&P Dow Jones Indices was not completely out of left field. Coinbase had been considered in the past and was thought to be a candidate. By market cap, the firm had already been one of the largest publicly traded U.S. companies not in the S&P 500 and has been profitable for a year and half with continued profitability expected.
The move obviously has huge implications for the stock as Coinbase has been a favorite among retail investors, but did not enjoy deep institutional support. By being added to a major large-cap index such as the S&P 500, certain funds with mandates to track that index will have to not only initiate the name but maintain a certain prescribed allocation as well. The stock has had its ups and downs of late but has for many investors has become the cryptocurrency exchange of choice as cryptocurrencies have enjoyed a resurgence in popularity for a variety of reasons.
Among those reasons are the fact that crypto-ETFs have gained broad acceptance as an alternative investment, the Trump administration is far more crypto-friendly than was the Biden administration, and a number of states have considered creating state-level cryptocurrency reserves. As a matter of fact, both New Hampshire and Arizona have actually gone ahead and officially enacted their own strategic reserves to be funded out of state resources. Texas and North Carolina are both known to be considering doing the same, while Montana has rejected such a development.
Needless to say, the stock is up a rough 15% in the early going on Tuesday morning.
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Last Week's Results
Coinbase Global released its first-quarter financial results last week. It posted adjusted EPS of $1.94 on revenue of $2.03 billion. These top and adjusted bottom-line results both fell short of Wall Street's expectations, but sales were good enough for year over year growth of 23.8%.
Guidance was on the light side as well. The company is projecting subscription and services revenue of $600 million to $680 million for the current quarter. Wall Street was looking for more than $700 million.
For the trailing twelve months, Coinbase has generated operating cash flow of $1.963 billion, with no real capex spending to speak of. That's all free cash generation, which is impressive.
The company has a cash position of $8.051 billion versus just $272.6 million in short-term debt, but long-term debt of $4.237 billion So, the books are in good shape. The firm's current ratio runs at 2.52, which is very strong.
My Thoughts
Coinbase is fundamentally strong. Still, the execution and the guidance are not as strong as one would like to see, especially with the resurgence in Bitcoin's value versus the U.S. dollar and the growing acceptance of cryptocurrencies as part of the investment landscape.
Sure, the increased investment by mandated portfolio managers is boosting the stock, but will there be staying power after those mandates are sated?
The chart is bullish. Readers will see the inverse head-and-shoulders pattern of bullish reversal. The neckline, or pivot point runs at $215. The stock has taken its 200-day SMA (simple moving average) Tuesday morning on a gap up open, as Relative Strength has surged.
The daily MACD (moving average convergence/divergence) is bullish as well with the histogram of the 9-day EMA (exponential moving average) in positive territory and the 12-day EMA running above the 26-day EMA with both of those lines in positive territory.
I am not long the stock, but based on these fundamentals, if I were, my price target would be around $258. The stock may test the 200-day SMA/unfilled gap created Tuesday morning at some, but I would think that this happens after May 19. I am thinking that I would like to short the stock up around that price target.
One synthetic way to make a bearish play based on that price level, would be to write May 23 $255 calls for about $5.65 and simultaneously purchase a like amount of May 23 $265 calls for about $3.65 just for protection's sake.
Bottom line, the trader would be risking a low-probability (my opinion) loss of $10 in ten days to take in $2 upfront.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
