Cathie Wood might like Coinbase (COIN) stock, but informed investors should be cautious as a class-action lawsuit pokes holes in Coinbase's reputation.
I'm flip-flopping today - there's no point in denying it. Not too long ago, I was bullish on Coinbase Global < NASDAQ:COIN> and even hinted at high price targets for COIN stock, like $444 and even $600.
My enthusiasm was fueled by some Wall Street analysts' optimism on Coinbase. I was probably influenced by my passion for Bitcoin < CCC:BTC-USD>, as well.
However, informed investors must be willing to adjust their stances and strategies when circumstances change. After all, flexibility is the key to long-term success in the markets.
So, let's delve into the ever-shifting developments surrounding Coinbase - the good, the bad and sometimes even the legally questionable.
A Closer Look at COIN Stock
The history of COIN stock is rather brief. Instead of conducting a typical initial public offering (IPO), Coinbase went public via a direct listing or direct public offering (DPO) on April 14, 2021.
The stock was assigned a starting price of $250 per share. However, it almost immediately went above $300 on the stock's first day of public trading.
Unfortunately, the folks who bought COIN stock above $300 and held their shares, haven't enjoyed huge returns.
And so far, it appears that Coinbase has disappointed many of its investors.
By early June, the stock had declined to the $220 area, and as of July 23, it was trading at around $223.
While we're here, I should point out that Coinbase's trailing 12-month price-to-earnings ratio is 46.38.
Value-focused investors might choose to wait for a lower valuation, and I respect that.
Just be aware that when there's cryptocurrency involved, traditional valuation metrics might not have the same relevance that they would with old-school, blue-chip stocks.
First, the Good (or Wood) News
As you may already be aware, there are investors who like to follow Cathie Wood and her ARK Invest funds.
These funds, as far as I can discern, are geared towards innovation and disruption - and on "momo" (momentum) stocks which sometimes have high P/E ratios.
"Disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be," Wood summarized on the ARK Invest home page.
So apparently, some of us don't "understand" that the market's high flyers can fly higher. Got it.
Setting my sarcasm aside (for a moment), I'll simply report the fact that as of June 1, 2021, COIN stock has a 3.5% weighting in the ARK Innovation ETF < NYSEARCA:ARKK>.
If that's a sufficient reason for you to invest in Coinbase, then be my guest.
There's no denying that the company is, indeed, innovative and disruptive.
Or at least, we can say that Coinbase got into the crypto trading platform sphere early. So, there's that.
A Class-Action-Sized Problem
Now that I've provided some (possibly) good news, it's time to balance the scales with an item of concern.
The suit was filed by law firm Scott + Scott, and names Coinbase shareholder Donald Ramsey as a plaintiff.
Here's where it gets nasty. Ramsey, reportedly, is accusing Coinbase and its executives of making “materially misleading statements” in their offering materials at the time of the company's public listing.
They're also being accused of offering positive statements that “lacked a reasonable basis.”
“At the time of the Offering: (1) the Company required a sizable cash injection; (2) the Company’s platform was susceptible to service-level disruptions, which were increasingly likely to occur as the Company scaled its services to a larger user base,” the class action specifically alleges.
To rephrase it informally, Coinbase is being accused of misleading its prospective investors while under-reporting the company's shortcomings.
Of course, like any lawsuit, this might go nowhere. Yet, the damage to Coinbase's reputation could linger for a while.
And if it's revealed, along the way, that Coinbase did actually engage in shady practices, the damage could run deep.
The Bottom Line
All in all, I'd say that valuation concerns are the least of COIN stockholders' problems right now.
At the very least, the investors will want to monitor the developments pertaining to the class-action lawsuit.
And if things go from bad to worse, it's okay to liquidate your position and await less fraught opportunities.
The stock market can be unpredictable, volatile, and sometimes totally nonsensical. InvestorPlace.com strives to cut through the noise and bring you information on what matters – and how it impacts your portfolio. We deliver thoughtful coverage on everything from stocks to cryptos to pre-IPO investments. So whether you live and breathe breaking stock news or expect your stocks to pay you, InvestorPlace.com has your back.
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.
COIN shares were trading at $242.19 per share on Monday morning, up $17.27 (+7.68%). Year-to-date, COIN has declined -26.22%, versus a 18.50% rise in the benchmark S&P 500 index during the same period.
About the Author: David Moadel
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
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