Summary Coinbase has almost doubled this year. However, bullish price action in Bitcoin means I'm still bullish on Coinbase. Below, we cover some risks to the bull case. The behavior we've seen in equity markets this year, in my view, means we're likely to go a lot higher by the end of 2023. There's plenty of fundamental news that is hard to be bullish in the face of, but if we simply look at price action of risk-on assets, I have a hard time not being bullish. Growth is outperforming value, the Nasdaq is destroying the S&P 500, and the subject of this article - cryptos - is another market where money is flowing in a very risk-on manner. Coinbase ( COIN ) has been in the crosshairs of the bull/bear argument in cryptos since it went public, which was less than two years ago. The company is a huge player in the crypto exchange market, and its fortunes, therefore, are tied mostly to retail traders wanting to own cryptocurrencies. When cryptos are flying, Coinbase generates huge revenue. Of course, that flow works both ways, and in recent months, there's been a lot of bad news for cryptos, and that's extended to Coinbase. The last time I wrote about Coinbase was back in December, and the company had just announced sizable job cuts. I slapped a buy rating on the stock at the time, and it's up 47% since then. Seeking Alpha If we look year-to-date, the stock is up a far more impressive 92% (!), so if we look at the stock in light of that gain, is it still a buy? The answer to that is somewhat tricky, as we've got a mixed bag in terms of the indicators I like to use. Let's dig in. Charting the path Let's begin, as we always do, with the chart of the stock. Coinbase is tremendously volatile - near-term options have implied volatility of 115% - so it's not for everyone. However, with big risks come big potential rewards, so volatile stocks just take some discipline to trade. I think Coinbase has a fairly favorable setup here, so let's take a look. StockCharts We can see the moving averages are strongly trending higher, and the rally in cryptos this week has seen Coinbase reclaim the previously lost 50-day simple moving average (in blue) and the 20-day exponential moving average (in red). The momentum indicators look good as well, with the PPO bouncing off of the centerline, which is textbook bull market behavior. In addition, the 14-day RSI bounced off of the 40 level, which again, is bull market behavior. The centerline of the PPO and the 40 level of the 14-day RSI are important support levels during bull markets, and we have those levels being respected for Coinbase right now. I'll note there's a huge amount of congestion in the $60 to $80 range, where the stock traded for months last year. That means there are a lot of holders with a cost basis in that range, and a lot of volume took place in that range. That means that we're very unlikely to just blast through and over that range, given we're likely to see sellers for those that bought last year and turned into bag-holders. That doesn't damage the longer-term case for bulls, but it's something to contend with as we look to eventually rally. The final panel in the chart is the correlation of Coinbase to the price of Bitcoin ( BTC-USD ), and we can see they are unequivocally linked. Therefore, it makes sense for us to look at Bitcoin itself, as the direction of Bitcoin will have a huge impact on the direction of Coinbase. StockCharts I'm quite constructive on Bitcoin right now, despite the failed breakout we had earlier this week. The level around $25k is a big one, and there was a very decisive breakout this week, that almost immediately failed. That's not great but I still think we're set up well here to eventually break out and go a lot higher. I've annotated the level the bulls need to break, as well as the next target, which is about 20% higher. If Bitcoin follows this path, Coinbase is going to soar. I think the balance of power with Bitcoin is firmly with the bulls right now, and that's very good for Coinbase. One final point on Coinbase with all of this in mind is that its short interest is still quite elevated. It's 19% as of now, which means that if we do get an upside move, it could snowball into a very sizable rally should short start covering. High short interest is not, I repeat, not, a reason to buy any stock. I'm simply saying that if the bulls can take over, the rally could accelerate quickly due to short covering. Let's now take a look at some fundamental factors. This is where it gets murky Anyone that has read my work knows I place a huge amount of value on charting and price action. However, fundamentals matter as well, and this is where the outlook is more challenging for Coinbase. Let's begin with revenue revisions. Seeking Alpha During the time where cryptos were super-hot, Coinbase's revenue flew higher, and estimates followed suit. The problem is that these estimates have come back down to earth in a big way. Now, can these be revised back up? Of course, they can, and if I'm right about the direction of Bitcoin, we will see these rise again. But this is a key risk of owning Coinbase right now. We have a rising stock price and depressed revenue estimates. Doesn't take a math wizard to figure out that means the valuation has deteriorated, and we'll look more into that below. In addition, Coinbase is still consistently operating at a loss, so there is no P/E analysis we can do, at least not yet. This is a $15 billion company that loses money, and that's something some investors (understandably) have an issue with. Doesn't necessarily bother me, but it's something to consider. Seeking Alpha's Quant Ratings are a useful tool when evaluating a stock, and Coinbase was relatively recently upgraded from sell to hold by the model. If you're curious how the model works, you can read about it here , but it's a way to approach stocks that take the emotion and opinion out of the decision-making process. That is exactly why I like technical analysis, because it takes the emotion out of investing, and it's why I reference the Quant Ratings. The upgrade of Coinbase by the Quant model is a feather in the cap of the bulls, in my view. Now, Coinbase was upgraded because its revisions and price action have improved dramatically, but the other three factors - valuation, growth, and profitability - all remain very weak. This is not an all-out buy signal, but for a business that has struggled for a few quarters, this kind of upgrade is often the precursor to a much bigger move. You can take or leave the Quant model, but to me, it provides additional evidence that the worst is likely already behind Coinbase. If we look forward, there are two basic scenarios to consider. My preferred scenario, and the one I think is most likely based upon current evidence, is that Bitcoin chops for a bit and then breaks out over the 25k level. Breaking out is the first step, and holding the breakout is the second one. Earlier this week, we saw half of this, but I think we'll get a breakout that holds in the relatively near future. That would unequivocally be good for Coinbase, and that scenario would likely see the stock soaring as revenue revisions would almost certainly move much higher. The other scenario is that the 25k level in Bitcoin holds as resistance, and Bitcoin retests its recent lows. If that happens, Coinbase could have a very significant downside. This is why we must use stops and not simply buy-and-hold anything. I look at stops in reference to major moving averages - the 50-day simple moving average in this case - and recent price lows. Based upon your personal risk tolerance, you should have a stop level in place if you decide to own Coinbase. On the risk side, apart from the risk that Bitcoin pricing falls, there's always regulatory risk for anything crypto-related. We've seen exchanges and financial institutions related to crypto fail, and that's always going to be a risk. This industry is still relatively new, and there's going to be headline risk that translates to Coinbase as a result. You have to be okay with this if you're going to own Coinbase. Valuing Coinbase stock Lastly, let's take a look at the valuation. As I mentioned, Coinbase has no earnings, so we'll use price-to-sales. TIKR The stock is at 5.3X forward sales, which is about the highest it's been since the start of 2022, apart from a couple of brief periods. I wouldn't necessarily say Coinbase is cheap, because the valuations prior to early-2022 were driven by bullish-all-things-crypto behavior in the markets. In other words, I wouldn't expect 10X or 12X forward sales again as a reasonable scenario to consider. Of course, one way for this ratio to come down is for revenue revisions to rise, and as I mentioned earlier, if I'm right about Bitcoin's price action going forward, we're almost certain to see revisions go higher for Coinbase. That would go a long way toward solving the valuation dilemma, so this is not a showstopper for me. But it's a risk I want everyone to be aware of, as the valuation was a lot more favorable three months ago. If we boil all of this down, what should we do? I recognize the risks of crypto-related stocks, and the headline and regulatory issues that can come with the space. Coinbase's valuation is also not something I'm jumping up and down about. However, the stock's chart looks pretty bullish to me, and above all, I think Bitcoin's bull case is strengthening in a big way. If we get a sustained breakout, Coinbase is going to be a lot higher than it is today, despite nearly doubling already this year. For this reason, I'm sticking with my buy rating despite the stock having a monster 2023 already.
