The investment case for next-gen trading stocks like Coinbase and SoFi despite crypto contagion

Published Tue, Nov 22 20223:01 PM EST

Cryptocurrency prices aren't the only ones suffering from FTX's spectacular blowup this month – investors may want to hit the pause button on fintech stocks too, at least in the near-term. The damage done by FTX, Alameda Research and their fallen leader Sam Bankman-Fried has more to do with risk management than cryptocurrency itself. Nevertheless, crypto trading services such as those offered by Coinbase , SoFi and Robinhood are likely to suffer a lull nevertheless as retail and institutional investors alike exit the market or try and move past their fear of another upheaval. "Coinbase has little direct exposure to FTX ($15m in crypto assets on the FTX platform), but we believe the number of negative near-term catalysts for the space outweigh the positives," Needham analyst John Todaro said in a note Tuesday. "We believe the next several weeks will be a critical time for the space as OTC firms, crypto lenders, funds, conglomerates, and BTC miners come under heightened pressure given their exposure to FTX." Needham lowered its price target on Coinbase, the largest U.S. cryptocurrency exchange, to $73 from $89 to reflect the increased uncertainty and risk. However, it maintained its buy rating on the stock. Todaro said investors should expect lower cryptocurrency prices, transaction volumes and blockchain reward revenue. Coinbase could even see an uptick in transaction revenue in the current quarter – there will be higher volatility and trading volume in the near term as investors assess how far and wide the damages reach. "However, we believe this increase in volume will be relatively short-lived and are forecasting dampened retail and institutional trading activity into 1H '23," Todaro said. Similarly, Barclays analysts say Coinbase is still "the most trusted and one of the best run" exchanges in the world and expressed optimism that its stock will be rewarded when the market rebounds. But more immediately, a "high degree of near-term uncertainty, particularly around asset prices and retail participation, keeps us on the sidelines for now," Barclays analyst Benjamin Budish said in a note Tuesday. "We are updating our model to reflect a 'lower for longer' assumption, particularly as it pertains to retail trading," Budish said. "We also expect Coinbase will engage in more aggressive cost rationalization, and with the expected increase in interest income over the next year coupled with cost cuts, we think insolvency fears (as are currently reflected in bond prices) are overblown." Barclays also lowered its price target on Coinbase Tuesday, to $55 from $44, but kept its equal weight rating on the stock. Budish noted that his team excluded Robinhood from its Coinbase analysis because the "vast majority" of FTX's volume was international, while Robinhood's is "100% domestic." Meanwhile, JPMorgan took a more optimistic tone on Robinhood. Its analysts said in recent days that Robinhood could benefit from the FTX fallout, as users and potential users migrate away from the platform. "While crypto only made up 8% of total trading volume in October, we suspect Robinhood could have been a beneficiary of FTX users fleeing that platform to other crypto solutions," JPMorgan's Kenneth Worthington said in a note last week. SoFi in a unique position This week, Democratic senators urged regulators to look into SoFi's trading activity as Washington attempts contemplates acting on FTX's spectacular collapse. SoFi has said its crypto revenue exposure is immaterial, it's compliant with regulators, doesn't do any crypto lending and had no exposure to FTX. Still Morgan Staley sees a greater likelihood now that there'll be more regulatory scrutiny on the bank and that it may exit its crypto business altogether. SoFi is in a unique position compared to other fintech companies offering crypto buying and selling in that it has bank holding company status. Bank holding companies generally can't engage directly in crypto activities. SoFi offers the service through a subsidiary. "Crypto is an immaterial part of SOFI's revenue base today, embedded within the brokerage line which is less than 1% of SOFI's total revenues (or as high as 3% back in 2Q21 when crypto valuations and trading volumes were much higher)," Morgan Stanley equity analyst Jeffrey Adelson said Monday. "More regulatory scrutiny is likely," Adelson added. "At this stage we do not believe regulators would place restrictions on SOFI's ability to grow the bank, which has been a source of robust growth for the company recently. However, it's possible that SOFI may find itself more heavily regulated with potential for incremental capital and liquidity requirements."