Sell Coinbase as rising competition and macro pressures will hurt the stock, Wells Fargo says

Published Thu, Sep 29 20226:01 AM EDT

A challenging economic environment will pressure shares of Coinbase going forward, making now a good time to sell, according to Wells Fargo. The firm on Thursday initiated coverage of the cryptocurrency company with an underweight rating and a $57 price target, implying that shares will fall more than 15% from where they closed Wednesday. The stock has plunged more than 73% in 2022. Wells Fargo sees several headwinds impacting Coinbase and its profitability, including the likely decline of its retail pricing, rising competition from companies such as Binance and FTX, the potential for increased government intervention and weakening macroeconomic backdrop. Coinbase was able to build a leading position as a cryptocurrency platform because of its early entry into the market. It has strong brand recognition and a sizable user base, but increased competition means those likely won't hold in the future. "Though we believe in the value of COIN's platform, we see its early-mover advantages gradually being eroded away as the competition increasingly mimics the COIN ecosystem," analyst Jeff Cantwell wrote in a Thursday note. Pricing issues Industry pricing trends are likely to start sliding, adding additional pressure to Coinbase – according to Blockchain.com, average fees per transaction across the industry have already slipped more than 50% in the past year, Cantwell wrote. "This is being driven by large competitors like Binance reducing or eliminating fees on certain cryptos to gain share: Binance now offers $0 fees for BTC and ETH," he said. "From a wider lens, historically we've watched brokerage firms follow a similar path of pricing compression over time—essentially, pricing is a 'race to $0' to grow/maintain market share." Coinbase just updated its fee structure to incentivize higher volume traders, and it's likely that retail fees will follow, according to the note. Profitability in question The "crypto winter" has also slammed asset prices and hurt Coinbase. Wells Fargo forecasts a 56% year over year decline in retail transaction revenue to $451 million for the third quarter. They also see a weaker 2023 than the rest of Wall Street due to macro weakness and a tougher regulatory backdrop squeezing shares of Coinbase. There isn't a clear path that Wells Fargo sees for Coinbase to reach profitability in the coming years, given the backdrop for the company. "Emerging pricing and competitive dynamics, weakening macro, and a shifting regulatory environment are headwinds," said Cantwell, adding that regulation will be a particular challenge for the company. "Though COIN is managing through all of these (including by offering products like a subscription model), we don't see a clear path for the company to reach profitability," he said. Coinbase shares dipped 2.4% in the premarket. —CNBC's Michael Bloom contributed to this report.