Recently, few companies have appeared whose brand name would become a household name. We all know about Jeep, the pioneers of a whole class of cars, Jacuzzi hot tubs, Dictaphone sound recorder and Keds sports shoes. And so, after the collapse of stock indices in March 2020, a lot of retail investors came to the market thanks to the mobile application of Robinhood Markets, which became known as “Robingodes”.
Robinhood Markets filed an S-1 application with the SEC on July 1 for an IPO. The exact date of the placement is not yet known. The company’s shares will be traded on the NASDAQ stock exchange under the ticker “HOOD”. Now let’s talk in more detail about the company’s business and consider how interesting its shares are for investment.
Robinhood Markets Business
Robinhood Markets was founded in 2013 by Stanford students Baiju Bhatt and Vlad Tenev. The company has developed a mobile application of the same name, thanks to which a large number of retail investors have entered the world of trading and investment. Robinhood is popular among the dominant generations of zoomers and millennials – these are young people for whom the Internet has been a part of everyday life almost from their birth.
The main products of Robinhood Markets are:
- Robinhood gold
- Current accounts (linked to a bank card)
- Fractional shares
- Cryptocurrency trading
- Robinhood Learn Platform Learning
Robinhood gold Is a paid subscription service (5 USD per month), within which the company’s clients receive additional market data, analytics from MorningStar and an instant recharge service. At the end of the 1st quarter of 2021, 1.4 million people used it.
Robinhood learn – the department of training and analytics, which includes the publication “Snacks” with 32 million subscribers. The company provides free access to proprietary news channels Barrons, Reuters and the Wall Street Journal. Within the framework of this service, users themselves make a list of the most interesting instruments (Robinhood Lists).
Over the past 12 months, the company’s client base has quadrupled. Robinhood opened, as of March 31, 2021, more than 18 million active accounts with USD 80 billion under management. On average, the account balance of each client reaches 4.4 thousand USD.
According to the company, the average age of its clients is 31 years. Most of them have insufficient experience in the industry, which is the reason for their losses. The consequence was that last week FINRA fined Robinhood $ 70 million for “misleading customers and encouraging risky strategies.”
Market and Competitors Robinhood Markets
In the United States, investment activity is quite popular among the population. The aggregate level of financial literacy is on average higher than in other developed countries. In 2020, there were over 50 million private investors in the United States. This is comparable to the population of countries like Ukraine.
The main competitors of the company are the largest brokerage companies:
- TD AmeriTrade
- Interactive Brokers
The main advantage of Robinhood is the absence of commissions for making transactions and fees for using the platform. This allowed the company to grow its customer base at a faster pace than its competitors.
Financial performance of the company
Robinhood Markets enters the IPO being profitable at the end of 2020, although it has repeatedly recorded a loss earlier. This is normal for fintech companies. Robinhood’s revenue is growing at an impressive rate, so we’ll start our analysis with this metric.
The company’s sales in 2020 amounted to USD 958.83 million, a relative growth to 2019 – 245.81%. For the first quarter of 2021, revenue reached 522.17 million USD, a relative growth compared to the same period in 2020 – 409.38%. Over the past 12 months, sales amounted to USD 1.35 billion.
The main sources of revenue for Robinhood are:
- “Payment for order flow” – payment for the order flow, when the execution of the transaction is carried out not by Robinhood, but by market makers. For this, the company receives a commission from them.
- Robinhood Gold subscription.
- Commissions from cryptocurrency trading (the company earned the most from Dogecoin).
Robinhood’s net profit in 2020 amounted to USD 7.45 million against a loss of USD 106.57 million a year earlier. The company earns about 2% of client assets. In the first quarter of 2021, a loss of USD 1.4 billion was recorded, which was caused by an adjustment on promissory notes issued. This occurs when the value of the stock rises relative to the borrowed amount and Robinhood captures nominal losses. Therefore, there is no need to panic here, since in this case it concerns the business indirectly.
Robinhood Markets strengths and weaknesses
Having analyzed the business model of the issuer, we can highlight its strengths and weaknesses. The advantages of Robinhood include the following factors:
- The target audience of the company is the dominant generations of millennials and buzzers.
- At the end of 2020, net profit was recorded.
- The company’s revenue is growing at more than 200% annually, making Robinhood the industry leader in terms of growth.
- Simple and straightforward product.
- No commission for transactions.
- Effective Marketing: The brand name has become a household name.
The risks of investing in Robinhood stocks include:
- The company has been unprofitable for a long time and does not plan to pay dividends.
- A significant part of the company’s revenue is generated by commissions from cryptocurrency trading, namely Dogecoin. Even the issuer is not sure that this coin will continue to be popular. As a consequence, revenue losses are likely.
- Robinhood may face the problem of retention of its client base in the future, as investors quickly lose their funds due to the abuse of risky instruments.
- The company was repeatedly fined by FINRA for poor quality information support for traders.
IPO Details and Capitalization Estimates Robinhood Markets
In the last round of financing last September, the company raised USD 800 million. The underwriters of the current placement are Siebert Williams Shank & Co., LLC, Samuel A. Ramirez & Company, Inc., Loop Capital Markets LLC, Academy Securities, Inc., Goldman Sachs & Co. LLC, JP Morgan Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Santander Investment Securities Inc., BTIG, LLC, BMO Capital Markets Corp., Rosenblatt Securities Inc, Piper Sandler & C, Wells Fargo Securities, LLC, Mizuho Securities USA LLC and Wells Fargo Securities, LL. The volume of supply and the price range are not yet known.
To assess the potential capitalization, we use the ratio (multiplier) P / S (capitalization / revenue). For fintech companies, during the lock-up period, it can reach 35-40.
In this case, the potential capitalization of Robinhood Markets may amount to USD 45-55 billion (USD 1.35 billion * 40). At the current growth rate, the company’s sales by the end of 2021 may reach 4 billion USD. In this case, a fair estimate of its value will be USD 160 billion.
Taking into account all of the above, I can recommend this company for medium and long-term investments.
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