Robinhood’s Generosity Isn’t Cheap For Shareholders

Investors are paying a big premium for shares of the free-trading pioneer, whose biggest growth is now coming from crypto

By Telis Demos

Robinhood executives, celebrating their IPO in July, have quickly built a cryptocurrency business. / PHOTO: AMIR HAMJA FOR THE WALL STREET JOURNAL

The stock-trading frenzy seems to be calming down for some of Robinhood Markets HOOD -2.25% ’ customers. 

The same comedown could happen to its shareholders at current prices.

After an extraordinary period that helped propel the company to a public listing, Robinhood’s stock-trading activity is no longer surging. 

Daily average revenue trades in equities not only dropped from the huge first quarter but they were flat from the second quarter a year ago, even as Robinhood added well over 10 million accounts in that time span.

In effect, the average funded account traded stocks roughly half as often in the second quarter as it did in the first quarter, or in the second quarter of last year. 

Equities transaction-based revenue was down from $71 million in the second quarter a year ago to $52 million.

For now, though, cryptocurrency is making up for that. 

Not only did customers trade crypto more often in the second quarter, but it also generated a lot more revenue per trade than in the past. 

Crypto transaction revenue was $5 million in the second quarter of 2020 and exploded to $233 million a year later.

Dogecoin, the Shiba Inu-inspired digital asset, was a big story: It was responsible for 61% of crypto transaction revenue in the second quarter, up from about a third in the first quarter. 

In total, dogecoin was responsible for about a quarter of the $112 average revenue per user in the second quarter. 

It was 6% of the first quarter’s $137.

For Robinhood’s big-picture story, this may be a success: It built a major crypto business in just a year, demonstrating an ability to diversify beyond stock-and-options trading. 

And if crypto is to become a cornerstone of the markets or economy, many investors will see a big opportunity in a firm building a huge base of crypto owners by offering trading commission-free, as it has with stocks and options.

But what should be worrisome for investors in the here-and-now is that crypto also brings more risk at Robinhood’s current market value, which is roughly 20 times consensus 2021 revenue analyst estimates, according to FactSet figures.

Crypto-focused Coinbase Global trades at under 10 times expected 2021 sales. 

That gap likely reflects a mix of beliefs about crypto activity slowing next year, that crypto prices might drop sharply, heightened regulatory risk or concern about how effectively crypto customers can be monetized with other financial products.

Meanwhile, firms such as active-trading platform Interactive Brokers Group and upstart digital financial services company SoFi Technologies also fetch closer to 10 times forward sales. 

So investors may be in a position where at Robinhood’s current price they are either paying for vastly superior growth to peers in its non-crypto businesses or paying a hefty premium for crypto exposure.

A slowdown in trading might not be surprising to investors given the extraordinary levels seen in recent months. 

The numbers in non-crypto trading could perk up as new account holders become more seasoned. 

Or investors might be anticipating growth in another product, such as cash management—or even something yet-to-be rolled out, such as a retirement account or a crypto-related product like a wallet.

But since some of those opportunities are hard-to-quantify, funded account growth has been one way to justify any premium for Robinhood. 

At a fast enough rate in a valuation model, it can make up for whatever the trend might be in revenue-per-user.

In the near term, though, it could be harder to count on the pace of account growth bailing out investors at ever-higher valuations. 

The company has said it expects to add “considerably fewer new funded accounts” in the third quarter versus the second quarter. 

Robinhood shareholders could be exposed if fewer people join its merry band. 

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