Goldman Sachs changes Coinbase’s rating from neutral to sell

• The general crypto market downturn and Coinbase’s share price drop may be the reason for Goldman’s new stance.
• According to the bank’s report, Coinbase has limited valuation support.

A Goldman Sachs report released on Monday has changed Coinbase’s rating to sell from a neutral. The report also cut the exchange’s share price target from $70 to $45. The lowered valuation resulted from the constant decline in crypto prices and the general crypto market downturn.

Goldman explains the reasons for Coinbase’s rating

According to Goldman, Coinbase shares lost 5.7 percent and traded at $59.40 during the pre-market trading session. However, the investment bank gave Robinhood markets a higher rating within the same report. Goldman Sachs changed its rating from neutral to sell. It also changed its price target to $9.50.

The pre-market trading data showed that Robinhood shares gained 2.6 percent to trade at $8.21. Coinbase’s revenue base took a hit following further implosion in the current crypto trading volumes. Hence, Goldman predicts that Coinbase’s revenue will plunge 61 percent year-on-year in 2022.

It also forecasts a 73 percent drop in the back half of 2022. Goldman Sachs claims Coinbase won’t return to profitability until it lays off more staff. It is worth noting that the top us crypto exchange announced a recent restructuring plan.

Part of its restructuring plan was to cut its staff strength by 18 percent. The report said a slow down in retail trading activity means that Coinbase still needs to reduce its cost base significantly. Thus, it can curb the possibility of a cash burn.

In the bank’s opinion, Coinbase must decide whether to dilute its shares or reduce its employee compensation significantly. However, the latter may negatively affect its talent retention. The recent announcement of a merge between Coinbase and Coinbase pro platforms means a “fee rate compression” for its users.

However, that’s another reason Goldman predicts that Coinbase will be engulfed in a harsh competitive environment. Coinbase rivals would also be competing based on price. Thus, it is likely that the exchange’s profitability would sink lower.

Coinbase market outlook

As of Q1 2022, Coinbase’s market cap is about $11.5 billion compared to a net cash position of nearly $3.8 billion. Hence, the bank predicts limited valuation support. Increased crypto prices and volatility would cause a rise in revenues in the short term.

However, the bank predicts that the company’s EBITDA adjustment will turn from breakeven to negative in the next few years. A recent Bloomberg data suggests that Coinbase stock currently has 20 buy ratings, five sell suggestions, and six neutrals. The release of Goldman Sachs’ report caused an additional 11 percent slump in Coinbase shares. It is down 75 percent this year already.

Besides equity investors’ negative sentiment about Coinbase, the company’s bonds are also under pressure. As of June 27, the firm’s unsecured bond is among the biggest decliners in America’s high-yield market. It is worth noting that these bonds won’t mature until 2031.

Related: Coinbase’s CEO responds to anonymous’ employee’s claims over toxic work culture