Coinbase: Job Cuts Won’t Go Far Enough (COIN)

Coinbase Restructuring

This morning (January 10th) Coinbase (NASDAQ:COIN) announced it is eliminating 950 positions or a 20% headcount reduction. The moves will cost the company $149-162 million with about $58-68 million being cash costs and the rest relating to accelerated vesting of equity awards. The company believes these cuts and costs will be substantially completed by the end of the first quarter of 2023.

This workforce reduction is a long time coming. For anyone who read my negative November piece on the company, I called out COIN’s bloated headcount and cost structure. While these cuts certainly help ease the bloat, I do not believe they go far enough, particularly given revenue trends. The company expects these moves will reduce forward operating expenses by 25%. Last quarter, those expenses were around $1.15 billion versus revenue that was $590 million. Some people will point out that almost $400 million of that cost was stock compensation, which shouldn’t be counted. I think that’s completely non-sensical as it is obviously a major component of employee compensation, which they certainly count.

But even if one were to be super generous to the company and not count stock comp, the company still would not be profitable if revenue held flat to the third quarter. Unfortunately for COIN, revenue trends will almost certainly come in down given the decline in value of almost every crypto currency. I also still do not understand why the company needs a headcount of just under 3,000 after the reduction in force. As I said in my previous piece, decentralized exchanges like Uniswap operate with only a handful of employees. I have a hard time seeing how COIN possibly needs thousands of people.

Risks: Beware the Short Squeeze

The main risk to shorting COIN is the squeezes that happen fairly regularly. Just yesterday (January 9th), the stock ripped 16% higher. The only exogenous propellant I saw was a Jefferies initiation with a neutral rating and a $35 price target. The most bullish thing about the report was the analyst expecting the company to survive the crypto winter, yet he expected 2023 to be rough waters. So, the rally to over $38 in my opinion was driven more by shorts covering after the stock dove to the $33 range on high volume last Thursday and Friday.

Conclusion

While this company likely still had over $4.5 billion of cash at year end, the net cash position likely only $1 billion or less. If revenue trends get really nasty, that net cash position could go away even after these cost cuts. Moreover, I just don’t believe a company that is running negative EBITDA should have an $8 billion market cap. Short positions in these companies are not for those with weak stomachs, but I ultimately believe this stock will continue to move lower as 2023 plays out.