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Coinbase Q1 earnings miss analysts' expectations

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On Thursday, Coinbase reported Q1 earnings that missed analysts' expectations on the top and bottom line. Myles Udland, Brian Sozzi, and Julie Hyman speak with New Constructs CEO David Trainer about how Coinbase is facing tough competition and could continue to experience adverse effects in the market

Video Transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Friday morning. Let's take a look at shares of Coinbase after the company's latest earnings report last night. Or we should call it a quarterly report last night. Stock up about 1 and 1/2%, had sold off initially in afterhours, then rose as much as 6% right as we got towards the opening bell. Things have leveled out here this morning. Stock trading just below $270 per share.

Let's talk a little bit more about Coinbase's latest quarter and about where the company stands in general. We're joined now by David Trainer. He's the CEO over at New Constructs. David, thanks for jumping on once again to talk about Coinbase. So as you see the company's quarter last night, does it change any of your thinking around where the company sits competitively within what's clearly a growing crypto market.

DAVID TRAINER: No, it doesn't at all. I think, if anything, it supports the thesis that the margins and growth that they're enjoying now is going to be very short-term. Competition is eating away at it even faster than expected, given the miss. And yeah, we think the valuation remains extremely elevated. And, yeah, our thesis is coming true even faster.

BRIAN SOZZI: Let's stay on that valuation. David, last time we talked to you in mid-April around the Coinbase IPO, you predicted that Coinbase is really worth $5 billion to $10 billion. The market cap right now is $50 billion. Off of the earnings last night, are you lowering your estimate below $5 billion, or do you see something higher?

DAVID TRAINER: No, I mean, you know, we don't-- I don't like to pretend I've got a crystal ball and know exactly what the value of a business is. There's so many dynamics that affect that. It's really more of a relative call. But no, I think what we were saying in the beginning is true, is that this business will be commoditized.

And I think, honestly, the underlying purpose of blockchain technology is not to make money for corporations, but to improve the prosperity of society. So I think it's a disintermediating technology that will not enrich companies like Coinbase. It will do the opposite. And yeah, Coinbase's margins are due to be meaningfully reduced. And I think best case scenario is, like, maybe $5 or $10 billion.

JULIE HYMAN: David, I don't know what you do at your firm in terms of shorting. Are you short Coinbase?

DAVID TRAINER: No, no, we don't do any trading. We're an independent research firm.

JULIE HYMAN: Gotcha, so you just recommend the folks stay away from this. Is there anyone in this industry-- it sounds like you think that the industry is just not attractive as a whole. Or do you think it's specifically Coinbase? In other words, would you look at other-- for example, if Robinhood becomes public. Are there other trading firms who can do well in this space?

DAVID TRAINER: You know, when you talk about space, if you're talking about blockchain as a space, I think it's extremely attractive. And I would recommend people looking at companies and businesses that are directly leveraging the blockchain technology. Like, Coinbase has got a wallet technology based on blockchain, but otherwise, the trades are done off chain.

So-- and then with respect to the exchange business, Julie, yeah, it's really competitive. You know, Robinhood had to kind of trick people into getting on board, right? I mean, they said the trades were free. We found out they weren't really for free in the way that they're being executed. It's a very competitive business. And competitive businesses tend to favor those with more scale. And it's going to be very difficult to get scale to match the Schwabs and the New York Stock Exchanges and the NASDAQs of the world. I mean, this is-- it's just-- it's a very tight and competitive business. And I don't see a lot of potential for other exchanges now.

BRIAN SOZZI: David, the Coinbase folks said they are going to bring in Dogecoin within six to eight weeks. Is that's something that can power, or at least, justify the valuation that Coinbase is getting in the market today?

DAVID TRAINER: No, no, you don't make a lot of money trading things. Like, for example, most people don't know that the forex exchange market is, like, 2.4 quadrillion or 35 times larger than the stock market. But we never talk about it. Why? Because there are no profits. Just because there's a big market for something doesn't mean there are profits to be made. And I think that's the point that people miss about blockchain.

Yes, it's going to disrupt some really big markets. But what it's going to do is displace the role of the corporate middleman in a lot of those markets. So corporate profits as a percentage of societal gain are going to shrink because of blockchain. And society will benefit. That's the underlying purpose there. And so, firms like Coinbase are-- you know, they're kind of tricking you into thinking, oh, because we're blockchain, we're going to be real profitable. Well, the real truth about blockchain is that companies are going to be less profitable.

MYLES UDLAND: All right, interesting stuff to consider as we continue to see the crypto markets mature. David Trainer, CEO at New Constructs. David, thanks for jumping on this morning.