Mizuho questions whether Coinbase interest income may be the 'next shoe to drop'

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By Sam Boughedda

Mizuho Securities analysts downgraded Coinbase (NASDAQ:COIN) to Underperform from Neutral, lowering the firm's price target on the stock to $30 per share from $42.

They said in a note to investors that interest income could be the "next shoe to drop".

"Interest income from Circle's USD Coin (USDC) has been increasingly important for COIN amid deteriorating crypto sentiment and trading volume," wrote the analysts. "Circle earns interest income on USD held in reserves that back USDC, by investing those reserves in short-term treasuries and interest-bearing cash accounts. As of December 1, 2022 ~25% of the ~$43bn USDC reserves were invested in cash and ~75% in treasuries."

"COIN's revenue from USDC is accounted for as USDC income sharing costs and has grown rapidly in 2022. For reference, USDC issuance attributable to COIN increased from $1.9bn (or 6% of total issuance of $33.6bn) in 1Q22, to $24.7bn (or 48% of total issuance of $51.2bn) in 2Q22," they added.

The analysts explained that the existing contract between Circle and COIN dates back to 2018, and while they have no grounds to believe that a renegotiation would occur, they see several factors that could potentially lead Circle to attempt to amend the relationship in the future.

"Our assessment of consensus estimates for interest income for COIN suggests that the Street is underestimating the potential risks," they continued.

"Overall, our work points to ~$2.4bn of revenue in 2023E, 25-30% below consensus. For 2024E, we now estimate $2.3bn in revenue (vs. $4.3bn consensus and our prior $2.8bn). For EBITDA, we now model -$134mn in 2023E (vs. slightly positive consensus and our prior +$143mn) and $362mn in 2024E (vs. >$600mn consensus and our prior $1bn)."