In the extraordinary statement to staff on Tuesday, Coinbase founder and chief executive Brian Armstrong raised the likelihood of a recession, and accepted responsibility for expanding the company’s workforce too quickly.
“We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter, and could last for an extended period,” he said.
“As we operate in this highly uncertain period […] we want to ensure we can successfully navigate a prolonged downturn. Our team has grown very quickly (>4x in the past 18 months) and our employee costs are too high to effectively manage this uncertain market.
“The actions we are taking today will allow us to more confidently manage through this period even if it is severely prolonged.”
Morningstar equity and credit analyst Michael Miller says the link between Coinbase’s earnings and the incredibly volatile crypto market is an obvious issue, but that is just one of the company’s several woes.
“Coinbase receives the majority of its revenue from retail trading fees, which have shown a strong correlation to the ebb and flow of cryptocurrency prices, leaving the firm exposed to market conditions and the intense volatility that follows,” he says.
“This complicates Coinbase’s hiring and spending needs as the firm’s revenue and customer base vary dramatically from quarter to quarter. This most recent move from the company reflects that difficulty.”
Reversing Recent Hiring
As a result, Morningstar downgrades its fair value estimate for the company’s shares from fair value estimate to $110 per share from $131. Shares are currently trading significantly lower at $51.58, though we emphasize that the company is likely to be entering a period of severe uncertainty. That may cool investor excitement about any bargain buys.
“The decision to shrink the labor force was not surprising to us, as the company’s targeted operating loss floor implied further cost-reduction efforts, given the low trading volume reported on Coinbase’s platform so far this year,” Miller says.
“While we do see the move as a positive and necessary step, it will not be sufficient to restore profitability to the company without a recovery in trading activity or additional cost reductions. It is worth noting that Coinbase ended the first quarter of 2022 with just under 5,000 employees, so while the announced layoffs appear severe, they are reversing relatively recent hiring activity.
“We are reducing our fair value estimate to $110 per share from $131, with the benefit of lower labor costs being entirely offset by a reduction in projected trading fee revenue. While Coinbase’s shares are trading well below our fair value estimate, we emphasize the heightened risk and uncertainty facing the company, which is likely entering a period of unprofitability with no clear timeline for when it will re-emerge.”
After a brief pause on Tuesday, Bitcoin is continuing its downward spiral, and at the time of publishing it was trading at $20,950, a day-on-day fall of 5%.
George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.