Yesterday after the market close, Robinhood Markets, Inc. (NASDAQ: HOOD) reported 3Q 2021 financial results that were markedly worse than any of the last four quarters and analysts’ consensus 3Q 2021 estimates, which themselves had already been reset lower based on prior management guidance. Equally important, the company issued dour guidance for 4Q 2021 results.
Robinhood’s share price fell 7.5% in after-hours trading to US$36.61. Based on the reported third quarter results and management projections for 4Q 2021, it is difficult to square Robinhood’s dismal results with an enterprise value (EV) of more than US$24 billion.
Key aspects of Robinhood’s earnings 3Q 2021 earnings release are as follows:
Net revenue sequentially declined a remarkable 35.4% to US$365 million in 3Q 2021 from US$565.3 million in the June quarter. Based on trends seen over the first 3+ weeks of October, management expects 4Q 2021 revenue to fall further to “no greater than US$325 million.” Full-year 2021 revenue should then total less than US$1.8 billion, implying that Robinhood’s EV-to-revenue ratio is about 13x. In comparison, The Charles Schwab Corporation (NYSE: SCHW), a peer online discount broker, trades at an EV-to-revenue ration of 8.8x.
The operating statistics of Robinhood’s brokerage platform explained the disappointing revenue performance in 3Q 2021. The number of monthly active users, assets under custody, and average revenue per user fell 11.3%, 6.9%, and 42%, respectively, from the period just three months prior.
Also, only 660,000 new accounts were opened in 3Q 2021. Net account openings were negative 100,000 in the quarter. In comparison, 4.5 million and 5.5 million net account openings took place in 2Q 2021 and 1Q 2021, respectively. Management expects 4Q 2021 new account openings will hold steady at around 660,000. Especially noteworthy is that the declines stated took place in generally buoyant equity and cryptocurrency markets in the third quarter.
Perhaps the most troubling part of this report: Robinhood had an adjusted EBITDA loss in 3Q 2021 of US$84.0 million, down from positive measures of US$90.2 million in 2Q 2021 and US$114.8 million in 1Q 2021. Very few growth companies, especially those with generous market valuations, see their cash flows dip well below zero after reporting positive adjusted EBITDA for four successive quarters.
Robinhood’s adjusted EBITDA for the last twelve months is now US$200 million, meaning that the company trades at an EV-to-EBITDA ratio of around 120x, an extraordinarily high figure. Based on management 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) | $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 – Period End | $0 | $7,369,522 | $2,179,739 |
On October 27, lock-up periods end for a portion of the stock holdings of current and former employees. On that date, about 12.6 million Robinhood shares become eligible to be sold in the open markets.
Justifying Robinhood’s US$24 billion EV is quite challenging given the company’s just-issued earnings report. Perhaps the business will regain its vitality in the not-too-distant future, but very few aspects of the 3Q 2021 earnings release can be viewed in even a moderately positive light.
Robinhood Markets, Inc. last traded at US$39.57 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.
