Reflecting the dramatic change in market mood over the last handful of months from embracing to disdaining high-valuation unprofitable stocks, Robinhood Markets, Inc. (NASDAQ: HOOD) shares have lost about 85% of their value since early August 2021. Whenever a stock corrects that drastically, investors are rightly tempted to establish a long position thinking a reflex rally is possible. In this case, however, increasing competition and a still uncomfortable valuation seems to argue against such a strategy.
On January 6, Acorns Grow Inc., a spare-change investing and checking account app especially popular with young savers and which is slated to go public via SPAC merger soon, is starting a feature that allows its users to invest their funds and “spare change” in securities they select instead of only Acorns’ own exchange-traded fund choices. When an Acorn customer makes a purchase with an Acorn debit card, Acorn rounds up the transaction to the nearest dollar and invests the “spare change” into the customer’s investment portfolio.
As a consequence, Acorns Grow will now compete directly for young customers who want to invest in stocks with other mobile platforms like Robinhood and legacy providers such as E*Trade and Fidelity. Like Robinhood, Acorns Grow does not plan to charge trading fees; however, it is a subscription service and charges small monthly subscription fees.
Rapidly expanding, Acorns Grow could potentially be a formidable competitor to all these platforms. As of mid-September, Acorns Grow had 4.3 million customers and its monthly subscriber retention rate was nearly 99%. It is of course unclear how many of these customers will choose to trade stocks. In comparison, as of September 30, 2021, Robinhood had 22.4 million cumulative funded accounts (with an average account balance of US$4,241), about 18.9 million of which are considered monthly active users.
Acorns Grow agreed to merge with SPAC sponsor Pioneer Merger Corp. (NASDAQ: PACX) in late May 2021. Per the transaction, Acorns would have a US$2.2 billion pro forma equity value. The merger is expected to close soon.
As of October 27, 2021, Robinhood’s shares outstanding were 859.7 million. Factoring in its September 30, 2021 cash balance of US$6.2 billion, and its share price of US$15.02, the company’s enterprise value (EV) is around US$6.7 billion.
Robinhood’s adjusted EBITDA for the last twelve months is about US$200 million, meaning that the online brokerage firm trades at an EV-to-EBITDA ratio about 33.5x, a high figure — even after the dramatic correction in the share price over the past five months. (Based on management’s guidance, full year 2021 EBITDA seems likely to be even lower from US$200 million, as in the next calculation a negative figure in 4Q 2021 will replace positive US$79 million realized in 4Q 2020.)
| (in thousands of US dollars, except otherwise noted) | 3Q 2021 | 2Q 2021 | 1Q 2021 | 4Q 2020 |
| Cumulative Funded Accounts (millions) | 22.4 | 22.5 | 18.0 | 12.5 |
| Sequential Growth | -0.4% | 25.0% | 44.0% | 9.6% |
| Monthly Active Users (millions) | 18.9 | 21.3 | 17.7 | 11.7 |
| Sequential Growth | -11.3% | 20.3% | 51.3% | 9.3% |
| Assets Under Custody (US$ billions): | ||||
| Equities | $69 | $73 | $65 | $53 |
| Options | $1 | $2 | $2 | $2 |
| Cryptocuttencies | $22 | $23 | $12 | $4 |
| Net Cash Held by Users | $3 | $4 | $2 | $4 |
| Assets Under Custody (US$ billions) | $95 | $102 | $81 | $63 |
| Sequential Growth | -6.9% | 25.9% | 28.6% | 43.2% |
| Average Account Balance (US$) | $4,241 | $4,533 | $4,500 | $5,040 |
| Sequential Growth | -6.4% | 0.7% | -10.7% | 30.6% |
| Average Revenue Per User (US$) | $65 | $112 | $137 | $106 |
| Sequential Growth | -42.0% | -18.2% | 29.2% | 3.9% |
| Options PFOF Revenue | $164,000 | $164,604 | $197,860 | |
| Cryptocurrency PFOF-Type Revenue | $51,000 | $233,103 | $87,587 | |
| Equities PFOF Revenue | $50,000 | $52,012 | $133,301 | |
| Other PFOF Revenue | $2,000 | $1,448 | $1,691 | |
| PFOF or PFOF-Type Revenue | $267,000 | $451,167 | $420,439 | $235,000 |
| All Other Revenue | $98,000 | $114,166 | $101,735 | $83,000 |
| Net Revenue | $365,000 | $565,333 | $522,174 | $318,000 |
| Sequential Growth | -35.4% | 8.3% | 64.2% | 17.8% |
| Adjusted EBITDA | ($83,999) | $90,173 | $114,771 | $79,000 |
| Cash | $6,166,705 | $5,077,752 | $1,402,629 | |
| Debt | $0 | $7,369,522 | $2,179,739 | |
| Shares Outstanding (millions) | 835.7 | 225.8 | 225.6 |
Simply stated, Robinhood’s valuation looks rich even after an 85% decline in its share price since August 2021. Moreover, the emergence of a credible competitor, such as Acorns Grow for its core young customer base adds to Robinhood’s risk profile.
Robinhood Markets, Inc. last traded at US$15.02 on the NASDAQ.
Information for this briefing was found via Edgar 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.
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