Coinbase Stock Surges After Strong Results But Legal Risks Remain

Coinbase reported a quarterly loss of 34 cents per share on revenue of $773 million, a significant improvement over the end of 2022, when the exchange posted a quarterly loss of $2.46 per share from $629 million in revenue. Analysts surveyed by FactSet expected the company to report a loss of $1.45 per share on revenue of $655 million.

The performance of the trading platform is enhanced by

bitcoin

A significant rally this year even as analysts take a cautious look amid regulatory battles with the US Securities and Exchange Commission. The Securities and Exchange Commission has warned Coinbase that it may sue the company for violating securities laws.

In a letter to shareholders, Coinbase executives attributed the earnings improvement in part to cost cutting at the company. The company said total operating expenses were down 24% from the previous quarter.

The company’s technology, development, and general and administrative expenses in the first quarter were lower than what Coinbase told investors to expect in February. Subscription and service revenue, which includes interest earned through a partnership on the USDC stablecoin, was higher.

The company said it expects a modest increase in expenses due to factors such as increased spending on marketing and legal services.

Despite efforts to diversify into its subscription and services business, the price of bitcoin remains key for Coinbase, and its financial profile was bolstered by a rally in crypto assets last quarter. With its core customer base remaining US retail investors, Coinbase is sensitive to both bullish and bearish market dynamics, because this group of traders tends to pile in when prices go up and run away when prices go down.

Analysts see continuing challenges.

“We expect unsettled positive trade, and a sigh of relief,” Dan Dolev, an analyst at Mizuho Securities, wrote in a note Thursday after the earnings announcement. On a previous note on Wednesday, Mizuho, ​​which rated Coinbase lower, lowered its price target for the stock from $30 to $27.

Coinbase is increasingly relying on “riskier revenue streams” such as small cryptocurrency trading and yield-based products, Dolev wrote, two areas the SEC has put under the microscope.

The digital asset space in general has come under intense US regulatory scrutiny over the past year, and Coinbase is no exception.

Coinbase revealed in March that the SEC had sent it a so-called Wells Notice, warning that the agency could sue the exchange. Coinbase said it was confident in the legality of its assets and services, but has since indicated that it would consider paying offshore if US regulatory clarity does not improve. This week, the company Coinbase International Exchange launchedan attempt to enter the lucrative cryptocurrency derivatives market through a platform regulated out of Bermuda.

“As things stand, long and short discussions begin and end with Coinbase’s regulatory quagmire,” Citi analyst Peter Christiansen wrote in a note Monday while downgrading Coinbase to Neutral/High Risk with a price target down to $65 from $80. “Until better regulatory ‘rules of the road’ are put in place in the US, the stock will continue to be saddled with this high level of uncertainty.”

Write to Joe Light at [email protected] and Jack Denton at [email protected]