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Earnings season: Robinhood doubles revenues but shares still drop
Trading app Robinhood reported some major wins in its first earnings report since going public but the stock slid after offering a stark guidance warning.
Robinhood headline stats
Robinhood revenues soared 131% year-on-year in the second quarter for a total of $546 million. The “app that seeks to democratise finance” was buoyed by a robust surge in cryptocurrency trading.
Transaction-based revenues totalled $451m, of which $233m – or over half – came from crypto trades. Cryptocurrency’s share of Robinhood revenues reached 51% in Q2 – soaring way above the 17% generated in the first quarter.
For comparison, digital currency trading revenues in Q2 2020 were just $5m. Now, more than 60% of Robinhood accounts are trading tokens.
Interestingly, it wasn’t Bitcoin or Ether that was the most traded token amongst HOOD users. Instead, the most popular traded crypto on the app was Elon Musk and internet favourite Dogecoin. The token accounted for 34% of all crypto trading transactions on the Robinhood app.
If you think about it, this sort of makes sense. Cryptocurrencies are a preferred asset of a new generation of traders; many of whom got involved in trading during the peak pandemic lockdown. They’re young and heavily swayed by opinions from non-traditional sources, such as Reddit.
Dogecoin is a bit of a meme, starting as a joke token, but has since gained massive popularity – not least due to the influence of perennial Doge champion Elon Musk.
The app also made incredible ground in some other assets. Options trading, for example, reached $165m in transaction-based revenues. A further $52m was sourced from equities trading. Robinhood also nets revenues from gold, although these are very small compared to its other market segments.
Robinhood’s assets under custody accelerated to $102bn – annualised growth of 202%. In Q2 2020, that figure was closer to $32bn.
The number of total funded accounts, i.e., those tied to a bank account, increased 151% year-on-year to reach 22.5m users. Robinhood recorded 18 million in Q1.
So, revenues are up. Assets under custody ballooned. The number of app users has increased too. All things considered, this first public quarterly earnings report should be a cause for celebration for Robinhood investors and traders surely?
Robinhood share price falls as app warns of slower Q3 trading
Robinhood tanked about 10% in after-hours trading after the report. It made gains last night on Wednesday but was once more in the red to the tune of 9% pre-market on Thursday.
The fairly major drop came after the app issued guidance for the rest of the year.
“For the three months ended September 30, 2021, we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter,” the company said in the earnings release.
Cryptocurrency exchange Coinbase gave a similar outlook in its Q2 earnings release earlier this month.
The app reported a second quarter net loss of $502m. It was profitable at this time last year. Even so, Robinhood said this was within the expected loss range of $487-537m.
Like Coinbase, Robinhood’s performance is now intrinsically linked to cryptocurrency price action. Dogecoin, Bitcoin and Ether are all subject to the major volatility that affects all crypto tokens.
“If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected,” the app said.
The key here is sustaining user loyalty. Many Robinhood users view their accounts in a similar way to sports-betting apps. When professional sport was called off worldwide due to the pandemic, many such users turned to stock markets and crypto trading for the perceived similarities it holds with gambling on sports matches.
Additionally, many Robinhood users feel the app is best used as a springboard. Once they’ve gained familiarity and a level of comfort with trading and investing, they then move onto other, more established institutions to raise their trades.
It will be interesting to see HOOD’s direction once the US economy opens up. Can it sustain activity from a new breed of users?
We did see a 4 million jump in the level of funded accounts in Q2, so perhaps it’s doable. But when the app is pegged so closely to crypto price movements, it may not be unfair to suggest that we’ll see some Robinhood share price volatility going forward.
Robinhood IPO launch misses the mark
Robinhood’s IPO launches with a fizzle
Robinhood, the app that seeks to democratise finance, has had a bit of a disappointing opening after launching on the Nasdaq on Thursday.
Out of the gate, share performance has already stumbled.
Shares opened at $38 at the lower end of Robinhood’s speculated price. The top end of its launch target was $42. While this was in line with Wall Street expectations, what happened next wasn’t.
Shares immediately fell, falling as far as 12%, and closing out the US session 8.4% lower at $34.82. With this the trading app’s valuation dropped to $29bn after having briefly reached $32bn on Wednesday pre-trading.
Data from Dealogic suggests the average first-day jump for US IPOs in 2021 is 39%. Compared against that, Robinhood’s launch is a very damp squib.
Robinhood was still one of the most popular stocks for traders during its first full day. 100 million HOOD shares exchanged hands for a value of $3.7bn. This surpassed other tech stocks like Tesla and Apple in terms of exchanged share volume, possibly from traders keen to trade the dip.
Why the drop?
It appears that institutional interest around this latest tech stock launch isn’t as high as Robinhood had hoped.
This is possibly down to higher scrutiny around the way Robinhood app is structured. Regulators in particular have issues with how the app appears to run on gamification models, rather than standard trading app infrastructure. A lack of customer support features – a bit of a no-no for a brand that has lofty egalitarian aims – has also attracted regulators’ ire.
The thing that really gets regulators’ goat about Robinhood is its controversial practice of selling trades. Robinhood uses payment by order flow, the long and short of which essentially results in higher retail investment commissions.
The Financial Industry Regulatory Authority (FINRA) issued its largest-ever penalty against Robinhood in June, $70m, for “widespread and significant harm” to customers. Not great optics for a company on the verge of going public as Robinhood was at the time.
FINRA opened another investigation into the California-based firm on July 26th into whether co-founders Vlad Tenev and Baiju Bhatt had failed to register with the regulator following the publishing of an updated company prospectus.
Then there are sustainability issues. The vast majority of Robinhood’s 31 million users become investors during the Covid-19 pandemic. Many of its users are fairly new and naïve to the complexities of investing. Robinhood also became the platform of choice for those participating in the recent meme stocks surge.
Robinhood has been on an impressive growth journey because of this. The number of accounts on its platform has doubled since the start of 2021.
But is this really sustainable? Will its customers, which tend to be young and inexperienced, want to keep going once Covid-19 restrictions are lifted fully around the world? It’s this uncertainty that could have dampened the tech stock’s appeal.
We also have questions around voting rights. Normally one share = one vote. That’s standard practice a lot of the time. However, founders Bhatt and Tenev keep voting control over Robinhood via its dual-class structure. The pair enjoys 65% voting control – despite owning less than 20% of its company shares.
Robinhood customers were supposed to be allocated up to 35% of shares upon the IPO launch, but this now appears to be more about 20%.
Again, this isn’t particularly democratic for an app that seeks to bring financial trading to the masses.
Where next for Robinhood?
Even though it missed quite a large target, Robinhood still proved very popular with retail traders.
Price action seems inextricably linked with the FINRA investigation and public perception of the brand going forward. Customer retention will be key here too. We’ll be watching Robinhood with great interest going forward.
Robinhood files for IPO: Just PFOF
- Regulatory scrutiny may present risk to business model
- Mega growth in active clients
- Crypto a growing part of the business
US online trading company Robinhood has finally filed for its long-awaited public listing in what’s sure to be one of the most closely watched IPOs of recent years. The company, which enjoyed rapid growth last year but has been at the centre of a storm over trading outages and restricting access to trades earlier this year when capital limits were reached, is seeking a valuation of around $40bn. The stock is set to list on the Nasdaq under the ticker HOOD.
The S1 prospectus dropped just a day after FINRA issued Robinhood with a $70m for “widespread and significant harm” to its customers. The investigation remains ongoing and Robinhood expects more penalties. There are numerous other cases, including class action suits relating to Robinhood restricting access to trading on a number of very volatile stocks at the height of the GameStop frenzy. As I commented on back in January when all this was taking place, I didn’t think Robinhood wanted to stop trading – it was just a question of regulatory capital requirements and Value at Risk models that left the clearing house demanding more cash up front.
Since having to secure $3.5bn from investors PDQ, Robinhood has strengthened the balance sheet considerably and now has about $4.8bn in cash or cash equivalents, plus it has a new $2.2bn revolving credit facility for financing margin trading in the event of another volatile episode.
“Our vision is for Robinhood to become the most trusted, lowest-cost, and most culturally relevant money app worldwide,” the company said in the SEC filing document. Part of this has involved offering questionable products (like stock options) to relatively unsophisticated traders. (Although the GameStop frenzy proved the Reddit crowd could be very sophisticated indeed, ganging together to concentrate out of the money calls where dealers couldn’t hedge on stocks with lots of short interest, the concentrated buying of the physical to squeeze shorts and create a gamma squeeze on the dealers). The tragic suicide of one customer
Robinhood has ridden – and in many ways helped fuel – a boom in retail trading in recent years, particularly since the pandemic hit. Retail investing now comprises roughly 20% of US equity trading volume, doubling in the decade from 2010 to 2020. “Yet, we believe there is still significant room for growth,” the company asserts. Meme stocks are a big part of the business and I think this presents a risk, albeit Robinhood itself could benefit from becoming the next big meme stock itself – a lot depends on how much reputational damage it suffered this year and how much good faith it retains among the retail crowd. The fact that it is reserving as much as 35% of the shares at IPO for its retail clients could be a master stroke.
For the year ended December 31, 2020, total revenue grew 245% to $959 million, up from $278 million in 2019. But it’s still not exactly profitable, recording net income of $7 million, compared to a net loss of $107 million in the prior year. Adjusted EBITDA rose to $155 million, compared to negative $74 million.
Fuelled by the meme stock craze, the first three months of 2021 saw total revenue grow 309% to $522 million, up from $128 million in the same period of 2020. However it recorded a net loss of $1.4bn in the quarter due to a $1.5 billion fair value adjustment to its convertible notes and warrant liability.
Incredibly, Robinhood has doubled the number of users since the start of the year, with 31m accounts. Of these, 18m are funded, representing a 151% increase from last year. Fundraising in 2020 indicated a market valuation of around $11bn, but the rapid growth in active accounts and revenues this year has seemingly propelled the company to seek a much larger valuation.
Payment for order flow
Robinhood came under fire in the first quarter of 2021 as meme stock craze exploded. Among the many charges levelled against the platform was the practice of paying for order flow. Robinhood sells market makers like Citadel client trades, who will execute at or better than the current market price. This is what enables commission free trading but has come under scrutiny as could represent a conflict of interest. Nevertheless, Robinhood made 75% of its revenues last year – some $720m – from selling client trades. Of this, about half comes from Citadel Securities (34% of total revenues).
This is perhaps the biggest risk for investors: the SEC has already fined Robinhood $65m for misleading customers over PFOF, as it is called. And chief Gary Gensler has ordered a review of the practice, as well as the ‘gamification’ of investing through apps and incentives. This would tend to put Robinhood in the crosshairs of the SEC just as the former seeks to go public and the latter is likely to get stricter. Timing appears problematic for Robinhood.
If the US regulator were to act on PFOF it could hit the very business model that Robinhood has relied on to secure growth so far. “Because a majority of our revenue is transaction-based, including payment for order flow … reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity,” the filing states (my emphasis).
Crypto trading: blame Elon
Robinhood specialises in stocks and stock options, but cryptocurrency trading is a growing part of the business. From just 4% last year, crypto accounted for 17% of revenues in Q1 2021.
Robinhood notes that 34% of its cryptocurrency transaction-based revenue was attributable to transactions in Dogecoin, as compared to 4% for the three months ended December 31, 2020. For a token set up as a joke, that’s a staggering amount – roughly 5% of all Robinhood revenues in the first quarter of the year.
“A substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected,” the S1 states.
I tend to think there is always another Dogecoin round the corner. Robinhood currently supports 7 cryptocurrencies on its platform. That compares with 25 at Markets.com.
Regulatory headwinds appear strong, particularly regarding PFOF, which should see the shares trade at a discount. Crypto is also clearly an area that presents a high level of regulatory uncertainty as well as unreliable flow and trading activity. Reputational risk is also a big factor post-GameStop and in a highly commoditized industry, it’s hard to see where it can really deliver much in the way of margin growth. The business is still not really profitable and the valuation of $40bn+ looks well above peers, even assuming growth continues apace this year.