Why Square is 'the ultimate victim' of crypto, according to an analyst

Mizuho Senior Financial Technology Analyst Dan Dolev joins Yahoo Finance Live to discuss the fallout from the FTX meltdown and what it means for other public stocks like Coinbase, Square, and Robinhood.

Video transcript

GARY GENSLER: This is a highly speculative asset class. These 10,000 projects-- many will fail, because entrepreneurs in all sorts of walks of business fail. Many will fail also because history tells us that we don't need and don't use microcurrencies.

JULIE HYMAN: That was the Securities and Exchange Commission Chair Gary Gensler suggesting many crypto projects won't make it. And for 2023, Bank of America finds that less than 5% of fund managers expect crypto to perform better than other assets. That's according to their recent fund manager survey.

Joining now to weigh in on the outlook for crypto in the wake of FTX's collapse is Mizuho Americas managing director and senior fintech analyst, Dan Dolev. Now, Dan, to be clear, you cover the companies that are publicly traded, regulated entities, by and large, not some of the smaller projects that Gensler was referring to. But it feels like, from a sentiment perspective, this is something that could weigh on the industry for a while. How are you viewing it?

DAN DOLEV: Yeah. I mean, I kind of agree with Gensler, for a change. I think he gets it. I think this is like the crypto-- it's a solution for a problem that does not exist. And I think a lot of these very speculative tokens that are traded on these platforms, particularly Coinbase, which is kind of the money center bank for these things, right? That's kind of the biggest party for these things.

And that's going to be the one that's going to be hurt most. So I totally agree with that. It's a solution for a problem that doesn't exist. Trading commissions are going to come down eventually, because people are-- volumes are already coming down significantly. And it's kind of a perfect storm for cryptocurrency. And you're going to see that with the Coinbase valuation over the next 12 months.

BRIAN SOZZI: Dan, looking to next year, how do you see things playing out for Coinbase? What are you modeling for? How do you model the bottom line for this company? How do you model a fair valuation when you have situations like FTX just hanging over the stock and the valuation continually?

DAN DOLEV: Yes, it's a great question. We slashed-- we slashed our numbers dramatically last week. Let me just tell you, I think consensus is overshooting revenue by a magnitude of, like, 30% and overshooting EBITDA by, like, 65%.

So people have them turn a profit next year. I don't think so. I think they're going to be unprofitable next year. On a good day, they might turn a profit in 2024. That's assuming things don't go further south from here.

So how do you model that? We're not even modeling any take rate diminishing from where it is today. So we're still modeling around 19 to 20 basis points of overall take rate over the next two years.

What you're basically seeing is volumes staying at where they are today, which is about $1.8 billion a day. That gets you to a 600-ish billion number for the year. And then, you take that, and you think about how much cost-cutting can they do.

The more cost-cutting they do, the more profits they're going to protect. But also, they can't grow the so-called ecosystem. So I think that that's how we model it. And how do you value it? It's like-- it's like a bottomless lunch at Olive Garden. I mean, there's no bottom--

BRIAN SOZZI: Oh, I like that lunch. Wait, so I should like Coinbase shares, right, Dan?

DAN DOLEV: I'm going to that lunch today. I'm going to that lunch today.

BRAD SMITH: Good luck. We all may be if the economy continues in this direction right now.

JULIE HYMAN: Gotta get value for our dollar there.

BRAD SMITH: Looking for some deals. Dan, while we have you, you've said that you think crypto is dead. What does that mean for some of the companies that are in your coverage universe, that are either holding crypto on their balance sheets or are hinging their growth prospects to crypto?

DAN DOLEV: Yeah. I mean, I think that there is no better-- there is no bigger victim of crypto than Square, or Block, right? I think that what happened with Bitcoin-- I think the overfocusing, the obsession, fixation-- whatever you want it-- on Bitcoin is actually a great story, right?

The idea to connect the three ecosystems between buy-now-pay-later, point of sale, and the Cash App, the Next-Gen neobank-- the problem with it is not the idea. The problem is the execution. So I think you're kind of preaching to the choir. The obsession or the management's obsession with Bitcoin is dragging down the whole story.

So I think that's been, I would say, a significant of the D rating that square has seen-- is because of the Bitcoin obsession. So I think that's kind of the ultimate victim of this era.

JULIE HYMAN: But is it a justified victim? In other words, the obsession is on the part of management, to your point. So I wonder, on the flip side of that, are there any stocks that are getting hit by the perception that they're overly exposed to crypto, and it's sort of not justified?

DAN DOLEV: Robinhood, right? I mean, this is like-- I mean, I've seen there's a downgrade today, I think, on the FTX link. Robinhood is completely-- I mean, look, they do trade. They do let people trade.

And it's the least part-- that's the part that I like the least about them-- is the whole Dogecoin thing. But I do think that there's other parts where there's the glass-half-full. Most of the revenues-- most of their profits are not done from crypto trading, right?

And this is just one other aspect of a bigger slew of opportunities or things that you could do with Robinhood. Now, they're offering retirement, for example. So crypto is becoming an ever-smaller part of trading volumes and revenue, and equities, options, what have you, are ever bigger.

The problem is they're kind of-- if you think about where they are and the FTX or same stake in Robinhood, I think they are unduly punished in this time. So hopefully, that would kind of fix itself over time, and they won't get that discount, because of that link.

BRAD SMITH: There are a lot of people that are seeking answers from the fallout of FTX, and individual investors that are not even in crypto right now that want to see some of the smoke clear before they decide to even start to nibble at what this future of decentralized finance could look like. What would you say to them in the wake of all of this?

DAN DOLEV: Decentralized finance is a great, novel idea. The tokens are worthless. And I think we should distinguish between those tokens-- I think Jamie Dimon called them pet rocks, right? The tokens-- just, they have no value.

That's the real bottom of this lunch at Olive Garden. Decentralized finance is a great idea, and I think it has a lot of future, completely unrelated to those tokens. And I think that's what I would say to those people.

That's the issue-- is that they've gotten linked together, and the hope of decentralized finance is now somehow linked to the tokens. I don't think it's merited, and I think that's what I would say to those people.

BRIAN SOZZI: All right. Well, enjoy those OG breadsticks. Mizuho senior financial tech analyst, Dan Dolev, always good to see you. We'll talk to you soon.