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Mizuho downgrades Coinbase, says stock could fall 30% if deal key to revenue is renegotiated


Crypto platform Coinbase could further struggle if a deal providing millions of dollars in revenue each quarter is renegotiated, according to Mizuho. Managing Director Dan Dolev downgraded the stock to underperform from neutral and slashed his price target to $30 from $42. The new target implies downside of 30% from Thursday’s close Dolev’s main concern is over the impact of income from Circle’s USD Coin, which he predicts accounted for 10% to 15% of Coinbase’s revenue in the third quarter of 2023. Coinbase gets some of the reserve interest earned on the U.S. dollars Circle holds in short-term treasuries and income-bearing cash accounts, but Dolev said that could be pulled back. “Our assessment of consensus estimates for interest income for COIN suggests that the Street is underestimating the potential risks,” he said in a note to clients. Dolev said he does not expect Circle to go back on its agreement in the future, but he said that he could see the company trying to amend its side of the deal using its leverage as the only entity that can mint Coinbase’s tokens. He also said management could rethink the deal as the amount of money going to Coinbase grows and as the recent termination of Circle’s SPAC could prompt changes to the business model. The agreement is bearing fruit for Coinbase at a rapid pace. Coinbase’s take increased from $4 million, or 22% of Circle’s reserve interest income, in the first quarter of 2022 to $22 million, or 27% of the total, in the second quarter. The third-quarter payout is estimated to come in at around $80 million, which translates to 32% of total interest revenue. For the entire year in 2024, the consensus estimate places interest income to amount to $685 million. But he said assuming a 25% chance of renegotiation, that could imply a $125 million decline of expected interest income, which could then translate into a hit to the year’s EBITDA of between 20% and 25%. That’s not the only place consensus is considered too high, he said. If transaction levels stay at the “new normal” seen since the dramatic reduction in November after FTX was pushed to nearly collapse , he said transaction revenue for the next year should be 35% below what analysts expect. Revenue from subscription and services could come in 30% below expectations. In all, Dolev expects around $2.4 billion in 2023 revenue, which would be about 25% to 30% below consensus expectations. Revenue should fall slightly to $2.3 billion in 2024, almost half the consensus estimate of $4.3 billion. The stock was trading down 1.1% in the premarket. It has lost 83% in 2022. — CNBC’s Michael Bloom contributed to this report.

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