To borrow from an old Benjamin Graham/Warren Buffett concept, the market is a weighing machine in the long term. Coinbase (NASDAQ:COIN) certainly has value as an exchange for popular cryptocurrencies like Bitcoin (BTC-USD). However, the market’s weighing machine is likely to send Coinbase stock lower as its valuation is too hefty right now.
The market’s short-term voting machine prompted a rally in Coinbase stock for a while. That happened, to a certain extent, because of the hype surrounding recently approved spot Bitcoin exchange-traded funds. Now that the hype is fading, however, it’s time to be cautious and take a sobering look at Coinbase’s excessively high valuation multiple.
Coinbase Rode on Bitcoin’s Coattails
I hate to say I told you so. Yet, I can’t help but to point out that Coinbase stock fell from $265 to $218 after I encouraged investors to take profits.
Coinbase just couldn’t keep riding Bitcoin’s coattails forever. The hype over spot Bitcoin ETFs and the Bitcoin halving event put Coinbase in the spotlight. But then, contrarian investors and value investors shouldn’t seek to buy stocks when they’re on the front page of the financial press.
Coinbase and other cryptocurrency-related firms might seem invincible in the wake of the Securities and Exchange Commission’s approval of spot Bitcoin ETFs. Coinbase’s management is quite audacious now, even to the point of taking the SEC to court to argue over the legal status of cryptocurrency.
Along the way, Coinbase continues to rake in substantial revenue for cryptocurrency transactions. Mizuho analyst Dan Dolev acknowledges this, but also has a serious concern – one that prudent investors ought to consider carefully.
A Bearish Price-Target Raise for Coinbase Stock?
Dolev recently raised his price target on Coinbase stock from $84 to $145, but don’t get the wrong idea. Along with pressure on Coinbase’s fees from the company’s competitors and other factors, Dolev cited Coinbase’s “rich valuation” as a concern.
There are different ways to measure this. Dolev observed that Coinbase currently trades at a “lofty” 26 times its 2025 consensus EBITDA multiple. For comparison’s sake, Dolev stated, “This is well above the 11-16x median for peers in payments, exchanges, and asset managers.”
I’ve got my own measurement, and it’s a classic metric you’re probably familiar with. Specifically, Coinbase’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 573.96x. To give you a sense of perspective, the sector median trailing P/E ratio is 10.58x.
Coinbase Stock: A Good Company at a Not-so-Good Price
I actually don’t blame Dolev for raising his Coinbase share-price target. The stock ran much higher than his previous target because of spot Bitcoin ETF hype, so Dolev had to make an adjustment.
The hype wasn’t meant to last forever, and now Coinbase’s shareholders are vulnerable to a steep drawdown. Hence, if Coinbase stock drops to $165, the company’s valuation will be more reasonable and investors should start buying. Until then, step aside and let the chasers chase, to their own detriment.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.