Coinbase Stock Has Soared. Why the Crypto Platform’s Shares Could Keep Rising.

Coinbase Global stock has been one of the top performers of the last 12 months, defying skepticism—including from Barron’s—that it would thrive during a regulatory crackdown on digital assets. Since hitting a low of $46.43 last June, the stock has more than quintupled to $264 as of early afternoon Wednesday.

A couple factors are helping drive the gains: The approval of the first exchange-traded funds to hold Bitcoin, a long-sought goal of crypto proponents, as well as a growing belief that institutions and financial advisors are on the cusp of adding digital assets to their portfolios en masse. J.P. Morgan estimates that these new ETFs gathered a net $1.045 billion on Tuesday, setting a single-day record and helping to bring their total assets to more than $31 billion.

Bitcoin this year has also climbed to fresh records. On Wednesday, it traded at about $73,000, up 200% over the past 12 months.

The ETFs can be traded for little or no fees on stock platforms like

Robinhood Markets

or Fidelity. That led to concerns that the new funds could eat into trading volume on Coinbase, which does charge fees.

But so far, those fears have proven unfounded, according to analysts led by JMP Securities Director of Financial Technology Research Devin Ryan.

In a research note, Ryan estimates the new ETFs could gather $220 billion in inflows in the next three years, propelling the price of Bitcoin higher. Ryan says Bitcoin interest will increase trading in other digital assets, and Coinbase’s revenue will diversify into other aspects of the digital economy, such as payments and the tokenization of real-world assets. In the past, most of the company’s revenue has come from retail trading.

“The point we believe most are still broadly missing is that we estimate Coinbase will grow with the overall crypto ecosystem, well beyond just trading volumes,” the analysts wrote. JMP Securities kept its Market Outperform rating on the stock, while raising its price target to $300 from $220.

Coinbase declined to comment. Company executives in the past have said Coinbase is seeking to diversify its revenue streams away from trading—with the goal of the company being able to turn a profit no matter whether cryptocurrencies are in a bull or bear market.

Of course, in buying Coinbase stock, investors are making a huge bet that the company can live up to what appears to be an extremely high valuation.

At about $264, the company is trading at a price-to-earnings ratio, based on the last 12 months of earnings, of 687, according to FactSet, compared with its average since going public of about 126. Based on analysts’ estimates of the next 12 months of earnings, the P/E ratio is 162.

Analysts overall have an average rating of Hold on the company with a price target of $184.47, according to FactSet, implying a 30% downside from current levels.

Another huge question mark for the company is how digital assets will ultimately be regulated in the U.S. Coinbase is being sued by the Securities and Exchange Commission for allegedly operating an unregistered securities exchange, a charge the company is fighting. A judge is expected to rule on whether the case can proceed in the coming weeks. If Coinbase ultimately loses the case, it could severely restrict what products it can offer in the country.

In a separate case, Coinbase is also attempting to convince a panel of judges to force the SEC to make clear rules on how digital assets should be regulated. SEC Chair Gary Gensler has said he believes the rules are already clear and that it’s incumbent on crypto firms to comply with them.

So far this year, all the investment winds seem to be blowing in Coinbase’s favor. But to justify a stock price more than 150 times earnings estimates, a lot will continue to have to go right.

Write to Joe Light at joe.light@barrons.com