Mizuho analyst Dan Dolev reiterates Underperform rating on Coinbase Global, Inc COIN with a price target of $30. Last Friday, COIN shared plans to temporarily pause USDC conversions after Circle disclosed the exposure of $3.3 billion of its USDC reserves at SVB Financial Group SIVB.
The pause led to a 10%+ drop in USDC market cap, with its value falling below par for the first time since 2020. USDC is the safest stablecoin and is backed by cash and short-dated U.S. government bonds.
The analyst reminds investors that USDC is critical to COIN. Circle earns interest on USD held in reserves that back USDC by investing those reserves in short-term treasuries and interest-bearing cash accounts.
Interest income is allocated to COIN based on the amount of USDC distributed by each party and the amount of USDC held in customers’ accounts on each party’s platform relative to the total amount of USDC in circulation.
COIN’s revenue from USDC is accounted for as USDC income-sharing costs and grew rapidly in 2022. Consequently, Circle’s payout to COIN increased. In 4Q, USDC revenue accounted for ~80% of COIN’s interest income and 23% of its total revenue.
Overall, Dolev estimates that if the USDC market cap remains at current (i.e., ~10% below last week’s average), this could drag COIN’s 2023 revenue by ~2%, with an even more significant impact on profitability given high decremental margins.
If, however, pausing conversions results in further USDC market cap bleed, consensus’s hopes for positive adjusted EBITDA in 2023 may prove overly optimistic.
Assuming the USDC market cap ends 1Q23 at a cap of $39.5 billion (down from $43 billion+ last week) and holds constant for the remainder of the year implies a $40-50 million negative revenue impact to COIN’s interest income in 2023. This would represent ~2% downside to consensus ’23 revenue. Assuming high decremental margins could result in a $30-40 million headwind to 2023 adjusted EBITDA.
In a less-conservative scenario where the USDC market cap continues to bleed by ~10% per quarter, the analyst sees potential for $80-100 million of negative impact to interest income (or 3-4% downside vs. consensus revenue) and $60-70 million of headwind to adjusted EBITDA.
Price Action: COIN shares traded higher by 12.50% at $60.13 on the last check Monday.