Given persistent headwinds and existential concerns, it could be wise to avoid stocks with major exposure to cryptocurrencies, such as Block, Inc. (SQ), Coinbase Global, Inc. (COIN), Riot Blockchain, Inc. (RIOT), and Marathon Digital Holdings, Inc. (MARA) until their prospects become clearer.
The waning interest in cryptocurrencies amid rising interest rates and the increasing threat of regulatory clampdown, also jargonized as Crypto Winter, has claimed one of its initial non-crypto victims. Earlier today, Silvergate Capital, one of the crypto market's top banks, announced its plans to wind down operations and voluntarily liquidate billions of dollars in assets to repay all deposits.
The implosion at Silvergate has its origin in the bankruptcy of FTX towards the end of last year. This has also prompted Federal Reserve chair Jerome Powell to echo risks that banks face from exposure to cryptocurrencies during his recent testimony at Capitol Hill.
However, with countries such as India going as far as imposing anti-money laundering rules to crypto transactions, Powell has also called for balanced regulation that doesn’t “stifle innovation in a way that just favors incumbents.”
With the fate of the entire cryptocurrency ecosystem hanging in the balance, let us take a closer look at the featured stocks.
Block, Inc. (SQ)
SQ is a technology company that creates tools to enable businesses, sellers, and individuals to participate in the digital economy. The company operates through two segments: Square and Cash App.
On September 22, 2022, SQ announced that it would provide “Buy Now, Pay Later” (BNPL) functionality to sellers using SQ’s e-commerce products across Canada. This marks the company’s first integration with Afterpay in the country. BNPL is a risky bet for SQ, with Apple Inc. (AAPL) and Affirm Holdings, Inc. (AFRM) emerging as rivals in this space.
In addition, according to a report by UBS analyst Rayna Kumar, the “risk profile” of Afterpay has changed amid rising interest rates and the potential of increased regulation.
For the fiscal year ended December 31, 2022, SQ’s total net revenue decreased 0.7% year-over-year to $17.53 billion. The company reported an operating loss of $624.53 million, compared to an operating income of $161.11 million during the previous fiscal year.
In addition, the company’s adjusted EBITDA declined 2.2% year-over-year to $990.96 million. SQ reported an adjusted net income of $613.12 million and $1.00 per share, down 9.2% and 21.9% year-over-year, respectively.
SQ’s total liabilities stood at $14.11 billion as of December 31, 2022, compared to $11.71 billion as of December 31, 2021.
The stock has slumped 6.1% over the past month and 22.5% over the past year to close the last trading session at $77.95.
SQ’s POWR Ratings are consistent with its uncertain prospects. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SQ also has a D grade for Stability and Quality. It is ranked #84 of 104 stocks in the F-rated Financial Services (Enterprise) industry.
Click here to access additional ratings for SQ’s Growth, Value, Momentum, and Sentiment.
Coinbase Global, Inc. (COIN)
COIN is a fintech company that provides end-to-end financial infrastructure and technology for the global crypto economy. The company offers financial accounts for retail crypto users, a liquid marketplace to institutions for crypto transactions, and technology and services for ecosystem partners.
Tensions have been escalating between COIN and U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler with the regulator’s move to classify most cryptocurrencies as unregistered securities, which would expose COIN to massive penalties and further regulatory scrutiny and clamp down.
Moreover, a potential SEC move to ban the practice of staking, or the locking up of tokens to receive a return, threatens to pile additional misery on the top line of COIN. This comes after the SEC signaled in the fall that cryptocurrencies that rely on staking might be deemed securities.
On January 12, S&P Global Ratings downgraded COIN’s long-term credit ranking, yet again, deeper into junk territory, cutting it by one notch to 'BB-' from `BB' with a negative outlook. According to the rating agency, the crypto exchange faces a hit to its profits amid a confidence crisis in the industry following the FTX implosion.
On January 10, COIN announced that it would eliminate 20% of its staff, amounting to an approximate headcount of 950 people, and enact broad cost cuts as part of its ongoing efforts to tighten its belt amid a crypto winter. This followed the company’s November 11 announcement when it was revealed that COIN has laid off just over 60 people.
These announcements were part of a broader cost-cutting plan announced in June, under which the company had decided to lay off 1,100 employees or 18% of its workforce at the time of the announcement.
On January 10, Nikhil Wahi, brother of Ishan Wahi, a project manager at COIN, was sentenced to 10 years in prison after pleading guilty to wire fraud conspiracy by using confidential information from COIN and amassing ill-gotten gains.
For the fiscal year that ended December 31, 2022, one that was tempestuous for the cryptocurrency ecosystem, COIN’s net revenue declined 57.2% year-over-year to $3.15 billion. Due to the ongoing crypto winter, a 65.5% year-over-year decrease in total transaction revenue to $2.36 billion was mildly offset by a 53.5% year-over-year increase in total subscription and services revenue to $792.6 million.
Notwithstanding consistency with its outlook, COIN reported an adjusted EBITDA loss and a net loss of $371.40 million and $2.63 billion, respectively, compared to the adjusted EBITDA of $4.09 billion and net income of $3.62 million during the previous fiscal year.
Analysts expect COIN’s revenue for the first quarter of fiscal 2023 to decline 43.3% year-over-year to $663.80 million. During the same period, its loss per share is expected to widen to $0.98, compared to $0.12 during the previous-year quarter. Moreover, the stock has missed its consensus EPS estimates in three of the trailing four quarters.
For the fiscal year ending December 2023, COIN’s revenue is expected to decline 10.4% year-over-year to $2.86 billion, while its loss per share is expected to come in at $1.67. Moreover, the company is expected to keep reporting losses over the next two fiscal years.
The stock has plunged 12.8% over the past month and 61.1% over the past year to close the last trading session at $63.01
It is no surprise that COIN has an overall rating of F, which translates to a Strong Sell, in our POWR Ratings system. It also has an F grade for Value and Stability and a D for Sentiment and Quality.
COIN is ranked #131 of 136 stocks in the D-rated Software – Application industry. Click here for additional ratings for Growth and Momentum of COIN.
Riot Blockchain, Inc. (RIOT)
RIOT focuses on Bitcoin and general blockchain technology. The company operates in the overall blockchain ecosystem through its cryptocurrency mining operations, internally developed businesses, joint ventures, and targeted investments in the sector.
For the fiscal year, which ended December 31, 2022, RIOT’s operating loss came in at $512.70 million, compared to a loss of $29.87 million during the previous fiscal year. As a result, the company reported an adjusted EBITDA loss of $67.19 million, compared to an adjusted EBITDA of $74.91 million during the previous fiscal year.
RIOT’s net loss for the fiscal year widened to $509.55 million, compared to a net loss of $15.44 million during the previous fiscal year, due to non-cash impairment charges totaling $538.6 million, including goodwill impairment of $335.6 million associated with the Whinstone and ESS Metron acquisitions in 2021, impairment of cryptocurrencies held of $147.4 million, and impairment of miners of $55.5 million.
The company reported an adjusted loss of $0.47 per share, compared to an adjusted EPS of $0.79 in the previous fiscal year.
Analysts expect RIOT’s revenue for the fiscal 2023 first quarter to decrease 3% year-over-year to $77.39 million. The company is expected to report a loss of $0.19 per share during the same period, compared to an EPS of $0.30 during the prior-year quarter. Moreover, the stock has missed its consensus EPS estimates in three of the trailing four quarters.
The stock has plummeted 8.3% over the past month and 15.6% over the past six months to close the last trading session at $6.30.
RIOT’s bleak outlook is reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. It also has an F grade for Stability, Sentiment, and Quality and a D for Value.
It is ranked penultimate among 80 stocks in the Technology – Services industry.
Click here to see the additional ratings of RIOT for Growth and Momentum.
Marathon Digital Holdings, Inc. (MARA)
MARA is a digital asset company that focuses on the blockchain ecosystem and the generation of digital assets. The company mines cryptocurrencies and holds bitcoins in an investment fund.
In the wake of the meltdown at Silvergate Capital Corporation (SI), MARA announced the termination of its credit facilities with the bank after prepaying its term loan in whole.
On February 28, MARA announced the cancellation of its webcast and conference call for the fourth quarter and fiscal year 2022, initially scheduled on that day. In addition, the company had also decided to postpone the publication of its corresponding financial results.
MARA’s revenues for the fiscal 2022 third quarter ended September 30 decreased 75.5% year-over-year to $12.69 million, led by reduced production and bitcoin prices. During the same period, the company’s operating loss widened by 107.9% year-over-year to $46.69 million. Its adjusted EBITDA came in at negative $8.70 million, compared to $78.78 million in the previous-year period.
Furthermore, the company’s quarterly net loss deteriorated by 240.2% year-over-year to $75.42 million, while its loss per share worsened by 195.5% year-over-year to $0.65.
Analysts expect MARA’s revenue and loss per share for fiscal 2022 ending December 2022, to worsen by 18.1% and 642.1% year-over-year to $123.29 million and $2.67, respectively. Moreover, the company has missed the consensus EPS estimates in each of the trailing four quarters.
MARA’s stock has plummeted 14.9% over the past month and 53.4% over the past six months to close the last trading session at $6.18.
MARA’s tumbling fortunes, especially in the wake of FTX bankruptcy and its impact on the broader cryptocurrency ecosystem, are reflected in its overall F rating, equating to a Strong Sell in our POWR Ratings system.
MARA also has an F grade for Stability, Sentiment, and Quality and a D for Growth and Value.
Unsurprisingly, it is ranked last of 104 stocks in the F-rated Financial Services (Enterprise) industry.
Click here to access the POWR Ratings for MARA.
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SQ shares were trading at $75.32 per share on Thursday afternoon, down $2.63 (-3.37%). Year-to-date, SQ has gained 19.86%, versus a 3.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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