Robinhood’s Crypto Fueled Q2 Earnings

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Robinhood released its first earnings report as a public company Wednesday after the bell. HOOD is down ~10% in pre-market following management remarks of a slower Q3.

Earnings Overview

  • Net revenues increased 131% YoY to $565 million (beating estimates of $522 million).
  • Transaction-based revenues increased 141% to $451 million.
    • Options revenue increased 48% to $165 million.
    • Cryptocurrencies revenue increased to $233 million (compared to just $5 million in 2Q2020).
    • Equities transaction-based revenue decreased 26% to $52 million.
  • Adjusted EBITDA was $90 million (above estimates of $75 million).
  • Net Cumulative Funded Accounts increased 130% to 22.5 million.
  • Assets Under Custody (AUC) increased 205% to $102 billion.
  • Robinhood started offering IPO Access to access shares of certain IPOs on May 20.
    • 6 companies (+Robinhood’s IPO) offered IPO shares to Robinhood customers.
    • The share of Robinhood allocations oversubscribed by greater than 5x.
  • Over 60% of net cumulative funded accounts traded in crypto during Q2.
    • This is the first quarter where a larger share of new customers placed their first trade in crypto rather than equities.

Management Commentary

Vlad Tenev, CEO

  • “We want to become the most trusted and most culturally relevant money app worldwide.”
  • On crypto wallets: ” It’s something that our teams are working on … We want to make sure it’s done correctly and properly.”
  • On plans for IRA, 401(k), and HSA accounts: “Giving people access to tax-advantaged accounts like IRAs and Roth IRAs as well as things like joint accounts and beneficiaries … we see all of that in the future.”

Jason Warnick, CFO

  • “Now over time, as our various products achieve maturity, you should see continued diversification and less reliance on any one revenue stream, such as payment for order flow.”
  • “Following high trading activity on our platform earlier this year and ahead of our IPO, we decided to procure additional cloud resources to help ensure site stability, particularly through June and July. Additionally, as we continue to invest in our development capabilities, we’ve been aggressively hiring technology-related head count.”
  • “As a reminder, our business is subject to seasonality, which generally shows strong growth numbers in Q1 and into Q2 and less so in the back half of the year.”
  • “We’ve experienced volatility from period to period that makes it difficult to accurately predict results in the short term, and so we’ll not be providing forward-looking guidance for key operating or financial measures.”

Outlook

  • For Q3, Robinhood expects seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts versus Q2.
  • Continued investment in key areas:
    • Enhance platform capabilities
    • Drive product innovation and improve customer support
    • Build upon regulatory and compliance functions
  • A one-time cumulative chare of $1 billion in stock-based comp for RSUs related to the IPO will be recorded.

Valuation + Analysis

  • Since its July 29 IPO, HOOD stock has been volatile.
  • Following the earnings report and muted Q3 guidance, the stock is trading down in pre-market ~$45 per share.
  • At $45 per share, HOOD is valued around $38.5 billion in enterprise value.
  • According to analyst estimates, at this valuation HOOD is trading ~16x forward sales and ~18x forward gross profit.
  • Also at this valuation, HOOD is trading around $1,700 per funded account versus E*Trade’s long-term average of $2,000 (Bought by Morgan Stanley for around $1,800).

KR: Justin’s video on Robinhood from before the IPO is still relevant now. Lower Q3 guidance is why the stock is down big in pre-market trading and it’s one of the areas of caution moving forward. Robinhood’s performance is closely tied with options trading and crypto and in turn, the activity of retail traders. If those markets are relatively subdued, Robinhood’s transaction-based revenue is bound to take a hit. Robinhood’s goal is to turn first-time investors into long-term investors. Is the product sticky enough to keep those users around? Or will investors “graduate” to more established brokerages? There are still enough question marks around the business for me at this valuation to pass on this stock for now [Meh 😐].

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