On August 30, several media sources reported that PayPal Holdings (NASDAQ: PYPL) is exploring the creation of a stock trading platform. The company has apparently already hired Rich Hagen as CEO for the potential online stock brokerage; he previously co-founded a similar business that was sold to Ally Invest.
PayPal’s potential online brokerage could represent a significant competitive threat to Robinhood Markets, Inc. (NASDAQ: HOOD), as PayPal is an extremely strong financial company (stock market value of US$339 billion), has more than 400 million active users (nearly 20 times that of Robinhood’s 21.3 million), and would target the same young investor customer base that Robinhood does. PayPal currently processes nearly one of every four online transactions in the United States.
The bull case for Robinhood is that it will continue to add young investors at a blistering pace, helped by its zero-commission framework, and this prospective growth both justifies its lofty stock market valuation and will allow it to expand. Robinhood’s enterprise value (EV) is around US$39 billion, and its adjusted EBITDA for the first half of 2021 was US$205 million. This implies that the ratio of EV-to-annualized adjusted EBITDA ratio is nearly 100x, an extraordinarily high figure for any growth company.
Robinhood can charge no commissions because of its payment-for-order-flow framework where it directs clients’ orders to market makers in exchange for fees. This technique is derided by full-service brokers who contend that the practice results in a less favorable transaction price for the online broker’s clients.
PayPal would not be the only major online payments company making inroads in the online stock brokerage business. Square, Inc. (NYSE: SQ) users can use that company’s Cash App to buy and sell Bitcoin (beginning in 2018), and to buy and sell stocks (beginning in 2019). In its 3Q 2020 earnings release, Square said that 2.5 million users had used its Cash App to buy stocks.
Robinhood’s 3Q 2021 Revenues Projected to Decrease Versus 2Q 2021 Levels
On its 2Q 2021 earnings call, Robinhood reiterated that its trading revenues will be down in 3Q 2021, a very unusual sequence for a growth company.
Note also that Robinhood’s adjusted EBITDA, a closely followed cash flow measure for growth companies, declined sequentially in 2Q 2021 to US$90 million from US$114 million in 1Q 2021 even though revenue increased 8% quarter-over-quarter.
| (in thousands of U.S. dollars, except otherwise noted) | 2Q 2021 | 1Q 2021 | 4Q 2020 | 3Q 2020 |
| Cumulative Funded Accounts (mill.) | 22.5 | 18.0 | 12.5 | 11.4 |
| Monthly Active Users (millions) | 21.3 | 17.7 | 11.7 | 10.7 |
| Assets Under Custody (US$ billions) | $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 |
| Options PFOF Revenue | $164,604 | $197,860 | ||
| Cryptocurrency PFOF-Type Revenue | $233,103 | $87,587 | ||
| Equities PFOF Revenue | $52,012 | $133,301 | ||
| Other PFOF Revenue | $1,448 | $1,691 | ||
| PFOF or PFOF-Type Revenue | $451,167 | $420,439 | $235,000 | $202,000 |
| All Other Revenue | $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 – Period End | $7,369,522 | $2,179,739 | ||
| Shares Outstanding (Millions) | 225.8 | 225.6 |
Robinhood’s stock declined nearly 7% in response to the reports of PayPal’s online stock brokerage initiative. However, given Robinhood’s still quite robust valuation, even after this decline and the competitive threat that PayPal poses, Robinhood’s shares still may face significant downside risk.
Robinhood Markets, Inc. last traded at US$41.42 on the NASDAQ.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
The Economy That Cried Wolf (Of Wall Street)
(title card concept stolen from Martin Scorsese and Jesse Hawken) This past March, when the...