Robinhood’s Q1 Earnings Overshadowed By Looming Payment For Order Flow Changes

Yesterday after the close, Robinhood Markets, Inc. (NASDAQ: HOOD) reported constructive 1Q 2023 earnings results. Its key operating metrics improved noticeably from 4Q 2022, and revenue and adjusted EBITDA likewise increased.

More specifically, the number of monthly active users rose to 11.8 million in the just-completed quarter, up from 11.4 million in 4Q 2022. This jump marked the first sequential quarterly increase since 1Q 2021 — when admittedly the number of MAUs was much higher, 21.3 million. Robinhood’s assets under custody likewise jumped in the quarter, reaching US$78 billion versus US$62 billion in 4Q 2022. 

The average balance of a Robinhood account holder was US$3,377 on March 31, 2023, up from US$2,696 on December 31, 2022.


(in thousands of US dollars, except where otherwise noted)1Q 20234Q 20223Q 20222Q 20221Q 2022
Cumulative Funded Accounts (millions)
     Sequential Growth0.4%0.4%0.0%0.4%0.4%
Monthly Active Users (millions)11.811.412.214.015.9
     Sequential Growth3.5%-6.6%-12.9%-11.9%-8.1%
Assets Under Custody (US$ billions):
     Net Cash Held by Users$11$8$4$4$4
Assets Under Custody (US$ billions)$78$62$65$64$93
     Sequential Growth25.8%-4.6%1.2%-31.0%-5.1%
Trading Volumes:
   Equity (US$ billions)$160$131$161$163$189
   Option Contracts (millions)272235235210237
   Cryptocurrencies (US$ billions)$11$11$15$19$23
Average Account Balance (US$)$3,377$2,696$2,838$2,803$4,083
     Sequential Growth25.3%-5.0%1.2%-31.3%-5.5%
Average Revenue Per User (US$)$77$66$63$56$53
     Sequential Growth16.7%4.8%12.5%5.7%-17.2%
Options PFOF Revenue$133,000$124,000$124,000$113,000$127,000
Cryptocurrency PFOF-Type Revenue$38,000$39,000$51,000$58,000$54,000
Equities PFOF Revenue$27,000$21,000$31,000$29,000$36,000
Other PFOF Revenue$9,000$2,000$2,000$2,000$1,000
PFOF or PFOF-Type Revenue $207,000$186,000$208,000$202,000$218,000
All Other Revenue$234,000$194,000$153,000$116,000$81,000
Net Revenue$441,000$380,000$361,000$318,000$299,000
     Sequential Growth16.1%5.3%13.5%6.4%-17.6%
Adjusted EBITDA$115,000 $82,000 $47,000 ($80,000)($143,000)
Debt – Period End$122,000$128,000$160,000$154,000$203,000
Shares Outstanding (millions)900.2892.8884.8878.3869.8
PFOF = payment for order flow.

Revenue in 1Q 2023 was US$441 million as interest income, including interest income from securities lending, rose markedly on the back of the persistent Fed rate increases. Comparatively, revenue in 4Q 2022 was US$380 million. Even more important, Robinhood’s 1Q 2023 adjusted EBITDA was US$115 million, marking the third consecutive quarter of positive adjusted cash flow. The company’s 1Q 2023 adjusted EBITDA matched the previous peak achieved in 1Q 2021.

For the twelve months ended March 31, 2023, Robinhood’s adjusted EBITDA was US$164 million. Set against an enterprise value (EV) of about US$2.7 billion (after factoring in the company’s US$5.3 billion net cash position), Robinhood stock trades at a fairly reasonable 16.4x multiple of EV-to-adjusted EBITDA. This represents a marked change from 1Q 2022 when the company’s quarterly adjusted EBITDA loss peaked at US$143 million.

On the other hand, Robinhood is facing a new round of regulatory scrutiny from the SEC. That agency, in conjunction with the Financial Industry Regulatory Authority, is investigating whether Robinhood adhered to rules regarding trade reporting related to securities lending and fractional share trading.

Payment for order flow concerns

The public comment period on the SEC’s 2022 order that significantly undercuts payment for order flow (PFOF) closed on March 31, 2023. PFOF comprised nearly 40% of Robinhood’s revenue in 1Q 2023. 

The SEC ruling, which will likely be implemented in late 2023, generally requires brokers (like Robinhood) to send marketable stock orders of US$200,000 or less into auctions (each auction takes perhaps three-tenths of a second to complete), where high-speed traders and institutional investors compete to fill the orders at the best prices. Under PFOF, Robinhood routes orders to chosen wholesalers in exchange for a fee.  

READ: Robinhood: Will The Coming Payment for Order Flow Restriction Hurt Earnings?

The SEC’s new rule could ultimately force Robinhood to start charging commissions. It is unclear how that would be received by its current and prospective clients. Non-zero commissions could dim Robinhood’s appeal to its young customer base.

Robinhood Markets, Inc. last traded at US$9.07 on the NASDAQ.

Information for this briefing was found via Edgar and the sources 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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