Thinking of Selling COIN After Today's Rally? Consider This First.

Diversified Financial company Coinbase Global is standing out today, surging to $85.39 and marking a 15.8% change. In comparison the S&P 500 moved only 1.0%. COIN is 21246.25% above its average analyst target price of $0.4, which implies future downside for the stock.

Yet the average analyst rates it as buy, a surprinsingly upbeat outlook. Over the last year, Coinbase Global shares have outperformed the S&P 500 by 13.0%, with a price change of 27.0%.

Coinbase Global, Inc. provides financial infrastructure and technology for the cryptoeconomy in the United States and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.

As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.

Coinbase Global does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-0.02 and $-5.67. We can see that COIN has a forward P/E ratio of -4269.2 and a trailing P/E ratio of -15.1.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 14.34, and the average for the S&P 500 is 15.97.

To better understand the strength of Coinbase Global's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-21 3,194,208 -5,233,833 -84 -315.38
2022-02-25 7,839,444 -3,494,950 39
  • Average operating margins: -22.5 %
  • Average operating margins growth rate: -36.3 %
  • Coefficient of variability (lower numbers indicate less volatility): 386.6 %

Coinbase Global's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-02-21 -1,646,457 -2,850 -1,643,607 -140.9
2022-02-25 4,016,099 -2,879 4,018,978
  • Average free cash flow: $1.19 Billion
  • Average free cash flown growth rate: -0.0 %
  • Coefficient of variability (lower numbers indicating more stability): 5683537618.9 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for COIN, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Coinbase Global's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.57 as of the first quarter of 2023.

With a negative P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend, we can conclude that Coinbase Global is probably overvalued at current prices. The stock presents poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.