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'Further cuts are needed': Goldman downgrades Coinbase amid crypto meltdown

The recent plunge in cryptocurrency prices has at least one major Wall Street firm staying on the sidelines for some crypto-linked stocks.

Goldman Sachs analysts on Monday downgraded shares of Coinbase (COIN) to Sell from Neutral, slashing their price target on the stock to $45 from $70.

In the same note, the firm upgraded shares of Robinhood (HOOD) to Neutral from Sell. Both companies offer cryptocurrency trading as a core part of their business.

"We believe current crypto asset levels and trading volumes imply further degradation in COIN's revenue base," Goldman Sachs analyst Will Nance wrote in a note Monday. The firm expects Coinbase's revenue will fall 61% in 2022, following a 514% surge in sales last year as Bitcoin and other cryptocurrency prices soared to record highs.

Goldman also notes that while Coinbase recently announced it would cut 18% of staff, these layoffs will not be enough to bring Coinbase's costs in line with lowered sales.

"We believe further cuts are needed, as the announced cost reduction effort merely brings headcount back to end-1Q22 levels and resulted in COIN moving to the low end of its previous expense guidance," Nance wrote. "We believe COIN will need to make substantial reductions in its cost base in order to stem the resulting cash burn as retail trading activity dries up."

The latest slump in crypto prices — with the total market capitalization of all cryptocurrencies dipping below $1 trillion in recent days from a record high of roughly $2.8 trillion last year — will likely have a commensurate impact on Coinbase's top-line results, Goldman Sachs suggested.

Photo by: STRF/STAR MAX/IPx 2021 4/10/21 Bitcoin rises above $60K as Ethereum hits a record high. The price action comes ahead of the listing of Coinbase on the Nasdaq Exchange. STAR MAX Photo: Coinbase logo photographed off an iphone SE 2020.
Photo by: STRF/STAR MAX/IPx 2021 4/10/21 Bitcoin rises above $60K as Ethereum hits a record high. The price action comes ahead of the listing of Coinbase on the Nasdaq Exchange. STAR MAX Photo: Coinbase logo photographed off an iphone SE 2020.

Goldman Sachs is also now "incrementally more negative" on Coinbase's ability to collect higher fees from users.

These concerns come following the platform's newly announced plan to merge its Coinbase Pro with its baseline trading platform aimed at retail customers with less trading experience.

"COIN’s retail platform has historically targeted less sophisticated customers aiming to easily/quickly buy/sell cryptocurrencies. This has allowed COIN to charge a significantly higher trading fee vs its more advanced counterpart, Coinbase Pro, which has been marketed to more active traders given its more advanced trading functionality and tiered maker-taker pricing schedule," Nance said. "We believe that combining these platforms will reduce switching cost friction between the two platforms and potentially lead to fee rate compression."

Goldman's new price target implies about 28% downside from Friday's closing level. Coinbase shares were down 77% year-to-date through Friday's close.

Robinhood upgrade

In the same note to clients, Goldman also upgraded Robinhood, a move that comes about two months after the firm downgraded shares to Sell.

The latest change is mostly on account of valuation, following Robinhood's more than 50% drop so far this year, and nearly 30% slide since early April.

Robinhood is also exposed to cryptocurrency price fluctuations: As of last year, 23% of the company's transaction-based revenue came from cryptocurrencies.

"Shares have underperformed significantly since our downgrade, and we now see a more balanced risk-reward," Nance said.

Robinhood's market capitalization briefly dipped below the level of cash it had on its balance sheet earlier this month before recovering, and Nance sees Robinhood's about $6.2 billon cash position and tangible book value of around $7 billion as "soft valuation floors" for the stock.

However, Goldman Sachs still lowered its price target for Robinhood to $9.50 a share from the $11.50 seen previously. Shares of Robinhood closed at $8.00 apiece on Friday after logging a record closing low of $6.89 on June 16.

"Fundamentals are still very weak for HOOD, in our view, as continued declines in retail trading risk appetite have weighed on active users and margin balances," Goldman said in its note. "We think shares are likely to remain range bound in the near term ... Longer term, we believe HOOD needs to see progress on more recurring revenue streams and a return to user growth and engagement levels for shares to outperform, and while we don’t see this occurring near term, a combination of valuation support and a significant interest rate tailwind over the coming quarters are enough to move us to a Neutral rating."

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.

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