Direct listings are something of a rage on Wall Street these days.
They avoid things like setting the IPO price, leaving money on the table and closing below the offer price (breaking).
But what a difference a year (almost) can make.
Take Coinbase (COIN) , for example. The stock closed at $328.28 on its Nasdaq debut on April 14. At that price, the company had a market cap of $85.8 billion.
Fast forward 11 months and the stock is down about 40%.
Real Money’s Paul Ginesin has a theory about Coinbase in particular and IPO stocks in general.
“Investors are often lured into buying hot IPOs of companies with new business models that are showing signs of hypergrowth,” Ginesin wrote on Real Money. “However, when they do go public, it’s often hard to tell whether the IPO will coincide with the exact moment growth is peaking, or if the growth is permanent. Wall Street typically chooses the latter, extrapolating growth well into the future.”
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That can be a problem. “When COIN shares went public last April, profits and earnings grew so rapidly that analysts had price targets that matched the value of Goldman Sachs,” Ginesin said. “Revenue grew from $190 million in 2020 to $1.8 billion in 2021 making it clear that Coinbase had made too much last year, with 2022 revenue expected to be lower and profits well below those of 2021.”
Prior to the company’s most recent earnings report, “EPS had already been expected to fall to $7.20 in 2022, but with renewed increased spending and lower trading volumes, Wall Street now expects 2022 earnings per share to be below $4 per share – down from $14.50 in 2021,” Ginesin wrote.
good timing
“In 2021, Coinbase was able to exploit market inefficiencies and cryptocurrency enthusiasm,” Ginesin added. “The company, along with other fees and services, achieved a high take rate on crypto transactions. But Coinbase’s revenue per transaction is down significantly from its peak due to increased competition and market efficiencies.”
A big part of the problem lies in the demand and performance of cryptocurrencies.
Coinbase stocks are highly correlated with the price of Bitcoin. Despite this, Ginesin expects the stock to underperform the cryptocurrency this year due to much higher spending. Stock-based compensation alone is expected to reach $1.5 billion, nearly 4% of Coinbase’s market cap.
Granted, the crypto markets could potentially accelerate significantly this year. Also, Coinbase is diversifying its revenue base with new products and will benefit from growing subscription and service revenues. Is that enough to get buyers to bite? Not really, said Ginesin.
“With Coinbase’s earnings per share expected to fall below $4 this year, compared to $14.50 in 2021, the company appears to have gone public at an optimal time for sellers,” he said.
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