Late in 2021, I observed that there were many troubles under the hood for Robinhood Markets (NASDAQ:HOOD). Lower share prices of meme stocks and pressure on crypto related revenues hurt topline sales results a lot, as I was quite concerned as the market at large was trading at a peak while penetration of users in the app was quite high already.
Democratize Finance For All
Robinhood aims to democratize finance for all, that is at least the official statement, as the loose interpretation could be that it facilitates investing in a game-like setting as well, attracting a whole group of new investors who have been burned quite a bit on average right now.
Ahead of the offering last summer, the company served 18 million accounts and with $81 billion in assets under custody at the time, average balances per client only totaled about $4,500, indicating that these are smaller and mostly first-time investors. The combination of the mobile application and commission “free” trading (as Robinhood makes its money from the spreads) was a major hit and drove the popularity of the application in recent years. The company has furthermore been “benefiting” from the short squeezes seen in meme stocks as the sound positioning into cryptos was well-timed as well.
With no commissions being charged, Robinhood makes its money from selling order flow and of course the “regular” interest margins. At the IPO price of $38, the company was awarded a $32 billion valuation, although that included some $6 billion in net cash.
This was applied to a business which generated just $277 million in sales in 2019 on which a $17 million operating loss was reported. Revenues more than tripled to $959 million in 2020 as modest operating profits of $14 million were reported. First quarter sales for 2021 came in at $522 million, accompanied by a $60 million profit, adjusted for losses incurred during the meme stock craze. Preliminary second quarter revenues came in at $560 million (as reported at the time of the IPO) with operating profits seen at $50 million.
While momentum was strong, risks were plentiful. This included a high valuation, increased competition, regulatory scrutiny, a potential market downturn, unstable trading infrastructure, losses at clients, and more. Soon after the IPO the company posted its second quarter results with revenues totaling $565 million, of which $451 million generated from transactions and the remainder from margins. Transaction based revenues include a $233 million contribution from crypto, $165 million in revenues from options and just $52 million in revenues from equity.
In October, third quarter revenues revealed that revenues rose just 35% compared to the year before, as a revenue number of $365 million was down some two hundred million on a sequential basis. Moreover, while the customer count rose to 22 million users, assets under custody fell to $95 billion. While shares fell to $19 already at the time, the issue is that excluding expenses related to the IPO, operating losses still came in at $130 million. The fourth quarter guidance, calling for revenues to fall further to $325 million, was not convincing as well.
With market penetration already high, operating momentum very soft in still solid market conditions, and losses being substantial, I found it very hard to see any potential appeal even as shares have come down quite a bit already, as there are so many concerns on the quality of the business model. Moreover, many of these items are not just risks, they have materialized quite a bit already at the time.
Since urging this cautious tone late in 2021, shares have come under further pressure as they quickly fell to the $10 mark in 2022, with shares trading at lows of $6 and change at some point in time, now having rebounded to $10 following some takeover speculation as well. In January, Robinhood posted fourth quarter revenues at $363 million, far ahead of the guidance and essentially in line with the revenue number posted in the third quarter. That was about the good news as the company posted an operating loss of $420 million, and while stock-based compensation was responsible for the vast majority of the losses, adjusted for that, operating losses still came in around a $100 million.
While the company guided for a decline in stock-based compensation expenses, that is not enough to return to profitability, certainly not as the company guided for first quarter sales at around $340 million. In April, it turned out that revenues fell 43% to $299 million, way short of the guidance, as transaction based revenues were down 48% to $218 million. The company resorted to posting EBITDA metrics as a $143 million loss as that metric actually understates the losses, not the least as it excludes a $220 million stock-based compensation expense.
In August, Robinhood posted a 6% increase in second quarter revenues to $318 million. Net losses came in at $295 million and while this marks a big improvement from the $392 million loss in the first quarter, these remain utterly disappointing numbers. The monthly active users count has fallen to 14 million, after a peak over 20 million in the second half of 2021, as assets under custody fell to just $64 billion, being the result of fewer accounts and lower balances with existing customers on the back of trading losses.
With 875 million shares now trading at $10, the resulting $8.75 billion valuation reveals that expectations are not too high, as the company holds $6.0 billion in net cash as well. This implies that operating asset valuations have fallen to just $2.7 billion, as operating assets even briefly were awarded a negative valuation at the recent lows.
The only positive news is that the company aims to post EBITDA break-even levels towards the end of the year, but even if this were to be achieved, that is still far away from reporting break-even results. Even in that case, losses are still huge, even as the company aims to cut its staff levels by approximately a quarter here.
The reality is that pretty much the only positive in the situation is that the current market value just surpasses the net cash holdings, as these will come down given the serious extent of the losses reported, even if these are set to come down a bit in the coming quarters. That is about the only positive news as the news about cost-cutting measurements and acquisition rumors have revived the shares a bit in recent weeks.
The truth is that despite the continued woes in the share price, the underlying operations have performed very poor in the first half of this year, as the declines in revenues are bad enough as they are, yet they come with great and increased losses as well.
These observations and the underlying quality of the operations and business remain too tricky to get involved, on top of the fundamental concerns on the business, as I see no reasons to get involved here now.