Investors holding shares of Coinbase Global (COIN) should be feeling much better than they did at the beginning of the year.
In 2023, the stock has rallied a staggering 89%, but the fierce rally is now giving D.A. Davidson anaylst Chris Brendler the signal to pump the breaks. Ahead of Coinbase's fourth quarter earnings due out next Tuesday, Brendler's team downgraded the stock to Neutral from Buy, while raising its price target to $60 from $55.
"The stunning FTX debacle is still reverberating through the sector and while it seems to have avoided major ripple effects so far (Binance bears watching), we believe the regulatory response is just getting started," Brendler said in a Thursday research note.
"While we still agree with [Coinbase] management's view that improved clarity and a level playing field should ultimately prove to be good, for both Coinbase and the sector overall, the near-term path looks increasingly treacherous."
Coinbase shares were up about 3% on Thursday amid a broader rally in crypto assets as bitcoin traded above $25,000 for the first time in six months.
"You don't need to own Coinbase to play bitcoin, miners like Riot Blockchain (RIOT) with no debt and bitcoin on their balance sheet have potential to rally a lot more than Coinbase," Brendler told Yahoo Finance in an interview.
Enforcement picks up
Over the past week, U.S. regulatory enforcement actions have targeted crypto firms in three of Coinbase’s business lines.
The SEC settled charges with competitor exchange Kraken a week ago, with the company paying a $30 million fine and agreeing to end its U.S. crypto staking program.
On Monday, stablecoin issuer Paxos also shuttered new minting for the Binance USD stablecoin. The company also said it received an SEC Wells notice, informing the company of a potential enforcement action.
On Wednesday, the SEC proposed amendments to its custody rule for investment advisors, which if approved would include requiring registered investment advisers, hedge funds, and wealth managers to keep their clients' crypto with a qualified custodian.
For Coinbase, the implications are not clear. The company’s chief legal officer, Paul Grewal, told Yahoo Finance last week it planned to defend its staking program in court, if need be. Addressing the SEC’s new custody proposal, Grewal also said Wednesday that as a trust company, Coinbase meets the agency’s definition of a qualified custodian.
Stablecoin issuer Circle, which pays Coinbase a portion of its asset reserves held in U.S. Treasuries in the form of interest income, also informed Yahoo Finance Wednesday it had not received a Wells notice from the SEC following the notice Paxos received.
"We think this may prove to be just the first wave of political attacks on crypto,” the D.A. Davidson wrote in its note. "Recent notes have highlighted the opportunities of staking and stablecoins due to higher interest rates as potential windfalls for Coinbase. Given recent actions by the SEC, it might not be as great as we thought."
In its third quarter, Coinbase posted $178.9 million in combined revenue from its staking, custody, and interest income business lines.
The figure represents 84% of Coinbase's non-trading revenue, the smaller side of its business that analysts of the crypto exchange look to for growth while crypto trading has proven sluggish during crypto winter.
D.A. Davidson is below consensus estimates for Coinbase's transaction revenue, anticipating it fell 8.2% in Q4 to $541.4 million from $590.4 million.
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