Breakout Alert: Coinbase's Consolidation Is About To End

Key Points

• Coinbase shares have been consolidating their gains for the past month.
• But with Bitcoin on the verge of breaking out, expectations are increasing for Coinbase to do the same. 
• The stock isn’t without its risks, however, and there are some reasons to be cautious.

There's no denying that equities are a strong market right now. The benchmark S&P 500 index has been powering to high after high since before Christmas, and there are increasing signs of the Fed beating inflation. 

With such a risk-on sentiment sweeping markets, many stocks that did so before the 2022 crash are back in vogue. One such stock in particular is Coinbase Global, Inc. NASDAQ: COIN, the digital cryptocurrency exchange. Its shares have been recovering for over a year now, but even with a 700% rally, they're still nowhere near the highs of its 2021 IPO. 

Links with Bitcoin

That's just to give some context on how hard some of these growth-focused tech stocks were hit and how much potential some of them still hold. Coinbase investors and many analysts covering the stock are looking for further upside from here. 

Much of Coinbase's upside, past, present or future, is tied to Bitcoin's performance. As the largest and most well-known cryptocurrency, it can safely be said that Coinbase catches a cold anytime Bitcoin sneezes. 

The same is true of the opposite, though, and it's no coincidence that Coinbase's eye-watering recovery rally broadly mirrored that of the biggest cryptocurrency. Bitcoin is consolidating with some healthy sideways action after logging more than 350% gains since 2022. 60% of those have come this year alone, and technically speaking, it looks like Bitcoin is on the verge of breaking out to the upside once again. 

Reasons to be Optimistic

Assuming this happens, investors should expect Coinbase to follow suit. It, too, has traded in a tight range since the start of March, and the daily range is indeed narrowing. It's also building up a pattern of higher highs against a strong layer of resistance around the $270 mark. This is like shaking a can of soda; eventually, it's going to pop. 

Last week, the Oppenheimer team reiterated its Outperform rating and boosted its price target to $276. This is now a street-high target and bodes well for Coinbase's performance in the near term. The analysts are concerned that Coinbase might be overly exposed to Bitcoin's performance and already overextended its profitability. And with a price-to-earnings (PE) ratio of 700, it's hard to disagree with them. 

Piper Sandler, for example, reiterated its Neutral rating on Coinbase shares this week, while the teams at Barclays and Bank of America both gave the stock a bearish Underweight rating. There's no doubt that, like crypto in general, it's a divisive topic among analysts and investors alike. 

Getting Involved

But the proof is in the pudding, or in this case, the stock's performance, and there’s no getting away from the fact that Coinbase shares have been defying gravity and these bearish analysts alike. If Bitcoin can break out of its current phase of consolidation and head for bluesky territory near or beyond $80,000, there’s every reason to think Coinbase will find itself trending north with it.

It will take a certain kind of investor with a particular appetite for risk to get involved in a stock that does hold some Sell ratings from heavyweights on Wall Street. However, the fact that Coinbase has been somewhat muted in recent weeks has done it no harm at all, as this has allowed the stock’s relative strength index (RSI) to pull back from the extremely overbought readings in the high 80s to a much more appealing 55. Considering that the past few weeks might just be the last few quiet ones that Coinbase shares will have for some time.