Robinhood Markets (NASDAQ:HOOD) made its long-awaited public debut at $38 per share on July 29, however the inventory opened at simply $33.35 and ended its first buying and selling day at $34.82. Ongoing issues about Robinhood’s enterprise mannequin seemingly overshadowed its spectacular progress charges.
Robinhood’s disappointing debut may remind traders of one other scorching fintech firm, Coinbase World (NASDAQ:COIN), which went public through a direct itemizing this April. Coinbase set a reference share value of $250 and opened at $381 on the primary commerce, however is now buying and selling within the $230s.
Robinhood and Coinbase benefited from comparable secular tailwinds. Robinhood generated explosive progress by disrupting conventional brokerages with free inventory and cryptocurrency trades. Coinbase, the biggest crypto trade within the U.S., additionally benefited from the general public’s rising curiosity in cryptocurrencies.
How briskly is Robinhood rising?
Robinhood’s income surged 245% to $958.8 million in 2020. Transaction-based income accounted for three-quarters of its high line, whereas the remaining primarily got here from curiosity on its margin loans and safety lending, in addition to subscription charges for Robinhood Gold.
Most of Robinhood’s transaction income comes from funds for order flows (PFOF), or the sale of its shoppers’ orders to high-frequency buying and selling companies. As an alternative of buying shares for its customers on a public trade, Robinhood sells its orders to a agency that income from the bid-ask spread. That observe may sound shady, however different retail brokerages — together with Morgan Stanley‘s E*TRADE and Charles Schwab — use the identical enterprise mannequin to cowl their “free” trades.
Within the first quarter of 2021, Robinhood’s income surged 303% 12 months over 12 months to $522.2 million. Its variety of funded accounts elevated 150% to 18 million, its month-to-month energetic customers grew 106% to 17.7 million, and its common income per consumer rose 65% to $137.
It is tremendously fashionable with youthful traders: Roughly 70% of Robinhood’s property below prospects (AUC) got here from customers between the ages of 18 to 40. It generated 17% of its income from cryptocurrency trades through the first quarter, up from simply 4% a 12 months earlier.
Robinhood squeezed out a web revenue of $7.4 million in 2020, in comparison with a web lack of $106.6 million in 2019. However within the first quarter of 2021, its web loss widened 12 months over 12 months from $52.5 million to $1.44 billion, primarily because of the larger truthful worth of its convertible notes and warrant liabilities. A big portion of these notes have been issued to keep it solvent through the Reddit-fueled buying and selling frenzy earlier this 12 months.
How briskly is Coinbase rising?
Coinbase’s platform permits traders to purchase a variety of fashionable cryptocurrencies, retailer them in on-line wallets, and hyperlink their holdings to Visa-branded debit playing cards. It additionally gives crypto-processing companies for companies and a digital stablecoin referred to as USD Coin, which is pegged to the U.S. greenback.
Coinbase generates practically all of its income from transaction charges. Its income jumped 144% to $1.28 billion in 2020, its buying and selling quantity rose 142% to $193.1 billion, and it generated a web revenue of $322.3 million — in comparison with a web lack of $30.4 million in 2019.
Within the first quarter of 2021, Coinbase’s income soared a whopping 843% 12 months over 12 months to $1.8 billion, its buying and selling quantity jumped greater than tenfold to $335 billion, and its variety of month-to-month transacting customers elevated 369% to six.1 million. Its web earnings skyrocketed from $32 million to $771 million.
Coinbase’s progress charges are undeniably spectacular, however the recent sell-off in Bitcoin and different cryptocurrencies has raised troubling questions concerning the firm’s future. If the cryptocurrency meltdown continues, Coinbase’s current customers may liquidate their holdings — and it may turn into rather more tough to achieve new customers.
Coinbase additionally faces intense competitors from different cryptocurrency buying and selling platforms like Robinhood, Sq.‘s Money App, and PayPal. All three of these corporations are higher diversified than Coinbase, which stays an all-in guess on the crypto market.
The valuations and verdict
Robinhood was valued at $29 billion, or 30 occasions final 12 months’s gross sales, after its market debut. It expects its income to develop 124%-135% 12 months over 12 months within the second quarter, and for its MAUs to rise to about 21.3 million.
Robinhood did not present any steering past the second quarter, but it surely would not be shocking if it doubled its income this 12 months. Assuming it is really buying and selling at 15 occasions this 12 months’s gross sales, it could really be cheaper than many other tech stocks producing slower income progress.
Analysts count on Coinbase’s income to rise 392% to $6.3 billion this 12 months, however that estimate is predicated on extraordinarily bullish expectations for the crypto market. If it may possibly hit that focus on, the inventory would solely be buying and selling at simply 10 occasions this 12 months’s gross sales — which makes it even cheaper than Robinhood.
That stated, I might nonetheless relatively purchase Robinhood over Coinbase as a result of it is higher diversified, it is locking in a rising variety of Gen Z and Millennial traders, and it’ll doubtless overcome its near-term rising pains. Coinbase appears tempting, but it surely’s a dangerous all-in guess on cryptocurrencies pinned to unreliable expectations.
This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in all our personal — helps us all suppose critically about investing and make selections that assist us turn into smarter, happier, and richer.