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Coinbase: 'You have to believe in the crypto economy', analyst says

JMP Securities Director of Financial Technology Research Devin Ryan joins Yahoo Finance Live to discuss Coinbase's second-quarter earnings results and the overall crypto industry.

Video transcript

SEANA SMITH: Let's take a look at Coinbase, shares off just about 6 and 1/2% here after hours, reporting a wider than expected loss of 498. Revenue coming in a bit late, 803 million. The Street was looking for 854 million. MTUs, Monthly Transaction Users, seeing the third quarter lower than the second quarter. Their second quarter MTU was 9 million. The estimate was for 8.4 million, so a bit better there. They also saying that trading volume coming in at $217 billion. The estimate was for $220 billion.

Also some guidance here just in terms of hiring. Coinbase saying that they expect limited hiring going forward expected for backfills, at least, for now. But again, that miss on both the top and the bottom lines one of the reasons that we're seeing the stock off just about 6% here after hours. Let's dig a little bit deeper into this report. We have Devin Ryan, director of financial technology research at JMP Securities. Devin, just your reaction to this miss here from Coinbase.

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DEVIN RYAN: Hey, good afternoon. Well, we need to spend some more time going through it in detail, but first glance, tough quarter. We were expecting a really tough quarter, so we're essentially getting that. I wouldn't say it's much worse. They missed revenues, it looks like, by about 3%. It looks like the reason that happened is because of mix between retail and institutional trading. So even though trading volumes were right in line with, I think, expectations, they make a little bit less money on institutional trading spreads. So there was more mix towards institutional.

And then, in terms of the outlook, we haven't spent a ton of time going through it yet, but it looks like they're reaffirming their guidance to operate within an adjusted EBITDA loss of $500 million for the year. So I would maybe take a step back here. The stock's up about 30% over the last week. This has been an incredibly hard hit stock in correlation with just broader crypto markets. Markets are down 60% in the second quarter. Coinbase volumes were down 30%. So it's all kind of tied together.

And third quarter, from what we see, has started on kind of a similar tone. And we're still in this proverbial crypto winter, and that hasn't ended. And that's, I think, playing through both second quarter results, but probably carrying into third quarter thus far.

RACHELLE AKUFFO: So what's the next move for Coinbase, given that, obviously, you have the business issues, and then you have a sort of broader contagion from the crypto winter. So where does Coinbase go from here to get growth?

DEVIN RYAN: Well, I think you have to ask yourself, do you believe in the evolution of the crypto economy? And if you don't, then Coinbase is not going to be a stock for you. And I think people that are negative don't believe in that. People that believe that we're still in the early innings of the further buildout of access to Web3 and just digital assets, more broadly, Coinbase is going to be a major player in that.

I think the announcement with BlackRock's Aladdin over the past week only solidified that Coinbase is really a marquee player to be an on-ramp into the crypto economy for both institutions, which is the Aladdin announcement, but also merchants, retail investors, and others that want to interact.

But the reality is that the market is still so nascent that you need to see a lot more development here. So this isn't anything new. We've seen massive drawdowns in crypto prices before. 60% decline feels like a lot relative to stocks, but relative to the crypto market, it's kind of ordinary over the past decade. And I think we're just in a tough moment, the current period.

DAVE BRIGGS: Coinbase certainly benefits from that partnership with BlackRock that you mentioned, allowing the institutional investors in. But largely, does it spread? Does it give some trust and credibility to the sector, not just Coinbase?

DEVIN RYAN: It's a great question. I think it does, but I think everybody is looking for more clarity here. We talked to a lot of institutions that are investing in the market, both equities, but also increasingly looking at crypto. And crypto is a tough landscape to navigate, just because there's not really clear rules of the road yet, or at least, perceived to be, particularly the conversation around what is a security, what is not.

And so I do think that there is a hesitation by some of the market until we have more clarity. But there's a lot of, I think, impetus in DC, in legislators, to move the ball forward here. You're seeing recent proposals on the Senate side. There's been a number of conversations, I think, in DC around bringing crypto more into the mainstream and having better regulatory frameworks around it.

And I think that's going to be a big deal to bring confidence and enable kind of that next generation of products in the crypto economy that we'll talk about. But the bottom line is, Coinbase is not just an exchange. They are an on-ramp into the crypto economy. And that's well beyond just offering people the ability to buy or sell crypto assets.

SEANA SMITH: And Devin, in this earnings release, Coinbase saying that they expect, quote, "soft crypto market conditions" from the second quarter continuing at least into the third quarter. You mentioned some of that uncertainty, the fact that we are still waiting for regulations in this space. Do you expect Coinbase to remain relatively volatile until we do get some clarity really mirroring what we have seen in the crypto markets?

DEVIN RYAN: Yeah, I do think it will be volatile. That doesn't necessarily mean it's going to be going down. Our view is that there's been a lot of negativity baked in. And I think you saw that with the Aladdin news. It doesn't take a lot of just mediocre news or good news for the stock to have a big reaction. And that can be positive at this point, given our starting point here. But there is a lot of uncertainty.

But the flipside is, if crypto prices-- and we're seeing a little bit of positive sign here over the last few weeks-- do stabilize and move higher, which I think many people that have kind of a longer term view expect, then Coinbase will likely correlate with that, correlated on the way up if you go back to 2021. And then in 2022, in the first half, it's kind of correlated with this big drawdown. But if you see prices stabilize, that will likely be a big driver.

But near-term, you're absolutely right. Volumes that we track are down roughly another 30% in the third quarter from the second quarter, so you had a really tough second quarter. Third quarter is not looking a lot better at this point. It's early. It's the summer. It's slow. But we think we're kind of seeing that same trend play through to Q2 thus far.

RACHELLE AKUFFO: And when you look at some of the macroeconomic pressures that are weighing on, especially for retail investors, how do you expect them to react to this? Obviously, institutional investors, like you mentioned, BlackRock leaning into this space, but when you have inflation, when you have potential recession fears, how do you think retail investors are going to analyze this time?

DEVIN RYAN: Yeah, it's another great question, where we've covered the brokerage space for a long time. And what you see is when there's extreme uncertainty, which I would argue right now, we're in a period where there's very elevated macro uncertainty, there's a lot of opinions around where markets are going for all types of risk assets. That's not a great environment to be leaning in as an investor, particularly on the retail side where you're looking for more conviction and more confidence.

Inevitably, that macro outlook, the consensus around where we're going is going to narrow. And when it does, we do think that conviction will come back. That will be beneficial to transactional activity. You see it in equities, too. If you go back to the first half of last year for both crypto and equities, it wasn't a normal backdrop. The first half of this year is not normal either.

And the pendulum will come back to the middle. And when it does, we do think retail investors will come back in a bigger way to this market. But it's just-- it's tough, you know. If you keep buying the dip, and the market's going down, you probably get a little bit less aggressive the next time. And I think that's the environment that we've been in. But that will inevitably change, in our opinion.

DAVE BRIGGS: OK, Devin Ryan, JMP Securities, good stuff. Thank you, sir.