Robinhood Profit Report Has Significant Holes
August 18, Robinhood (NASDAQ: HOOD) released its second quarter 2021 results. Net revenues totaled US $ 565 million, compared to US $ 520 million in 1Q 2021, and the company’s net loss was US $ 502 million, compared with loss of US $ 1.44 billion in Q1 2021.
Most analysts pointed to a significant increase in cryptocurrency trading by Robinhood investors in 2Q 2021 and the company’s reiteration of its previously announced warning that its trading revenues will be down in 3Q 2021 – a remarkable development, in our opinion, for a company that the markets continue to apply an enterprise value (EV) of approximately US $ 39 billion and a very generous cash flow valuation ratio.
|(in thousands of US dollars, unless otherwise indicated)||2Q 2021||1Q 2021||4Q 2020||3Q 2020|
|Accumulated capitalization accounts (in millions)||22.5||18.0||12.5||11.4|
|Monthly active users (millions)||21.3||17.7||11.7||10.7|
|Assets in custody (billions of US dollars)||$ 102||$ 81||$ 63||$ 44|
|Average account balance (US $)||$ 4,533||$ 4,500||$ 5,040||$ 3,860|
|Average revenue per user (US $)||$ 112||$ 137||$ 106||$ 102|
|PFOF Income Options||$ 164,604||$ 197,860|
|Cryptocurrency PFOF type turnover||$ 233,103||$ 87,587|
|PFOF Income Shares||$ 52,012||$ 133,301|
|Other PFOF revenues||$ 1,448||$ 1,691|
|PFOF or PFOF type income||$ 451,167||$ 420,439||$ 235,000||$ 202,000|
|All other income||$ 114,166||$ 101,735||$ 83,000||$ 68,000|
|Net revenue||$ 565,333||$ 522,174||$ 318,000||$ 270,000|
|Adjusted EBITDA||$ 90,173||$ 114,771||$ 79,000||$ 59,000|
|Cash||$ 5,077,752||$ 1,402,629|
|Debt – End of period||$ 7,369,522||$ 2,179,739|
In our opinion, investors should be concerned about several aspects of Robinhood’s 2Q 2021 earnings release:
- Adjusted EBITDA, a closely watched cash flow measure for growing companies, declined sequentially in 2Q 2021 to $ 90 million from $ 114 million in 1Q 2021, although revenue declined. increased by 8% quarter over quarter. Such a drop in cash flow for a growing business, as revenue grows, is quite unusual.
- Robinhood’s adjusted EBITDA for the first half of 2021 was US $ 205 million. As noted above, its EV is around US $ 39 billion, which makes its EV to Annualized Adjusted EBITDA ratio of around 95x, an extraordinarily high number for any business. By comparing, NVIDIA Corporation (NASDAQ: NVDA), perhaps the world’s fastest growing and most popular semiconductor company, trades at an EV / EBITDA ratio of 69x.
- In the second quarter of 2021 and throughout the first half of 2021, approximately 80% of Robinhood’s total revenue came from ‘payment for order flow’ or PFOF, for stocks and options and ‘trade discounts’ for crypto. currencies.
In all three cases, Robinhood directs client orders to market makers in exchange for a fee. The PFOF technique, which allows Robinhood to charge zero commissions, is being ridiculed by full-service brokers (charging commissions) who argue that this practice results in a less favorable transaction price for the online broker’s clients. The new chairman of the SEC, Gary Gensler, is investigating the practice. He said such payments can be a “conflict of interest” for customers.
- Cryptocurrency ‘trade discounts’ increased an astonishing 166% in 2Q 2021 compared to 1Q 2021. Surprisingly, most of Robinhood’s crypto income came from trading Dogecoin, and not from the much bigger digital currencies. Bitcoin and Ethereum. However, and perhaps more importantly, Robinhood’s PFOF revenue in its core equity and options business plunged 61% and 17% respectively. Further declines seem likely in 3Q 2021.
- Robinhood does not charge its clients any explicit fees for buying or selling cryptocurrencies (or for stocks or options). A full-service broker might argue that Robinhood’s hidden fees are lower than ideal order execution due to the routing of orders to market makers. The increase in cryptocurrency trading by Robinhood customers could indicate that it is moving retail away from Coinbase. In turn, this could potentially put pressure on the around 3% fee that Coinbase charges its customers per transaction.
Robinhood quickly established a fast growing business and experienced strong revenue growth. However, the stock trades at high valuation levels, close to “memes stocks,” and the average Robinhood account size of around US $ 4,530 is only 2-4% of that of clients of. E * Trade or TD Ameritrade.
Robinhood Markets last traded at US $ 42.64 on the NASDAQ.
Information for this briefing was found through Sedar and the companies mentioned. The author has no title or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author does not hold any license.