Robinhood plans to go public at a valuation of around $35 billion. As Robinhood is a modern financial services brokerage firm, it makes sense to compare Robinhood to traditional brokerages — like Charles Schwab and Interactive Brokers — and high growth fintech companies with public financials — like Coinbase, Affirm, and Lemonade. 

Robinhood’s 2020 revenue was $958.8 million, so it has a revenue-to-valuation multiple of more than 36x. Charles Schwab’s 2020 revenue multiple sits at more than 8x and Interactive Brokers’ multiple is at nearly 3x. When comparing Robinhood to its traditional brokerage competitors, Robinhood seems quite overvalued. However, that isn’t exactly a fair comparison given Robinhood’s innovative and addictive product, its growth prospects, and its continued cultural relevance. Comparing Robinhood to its modern fintech peers paints a better picture. The average revenue-to-valuation multiple between Square, Coinbase, SoFi, Affirm, and Lemonade is 23x, and the median is 19x. While Robinhood’s 36x is still higher than its fintech peers’ multiples, it doesn’t seem outrageous when considering the company’s growth prospects and excellent traction. 

It is also useful to examine how recent fintech initial public offerings (IPOs) have fared after debuting on the public markets. Coinbase, Affirm, Lemonade, and Upstart are all fintech companies that have gone public within the last year. 

• Coinbase filed to go public at $250 a share. It opened 52% higher at around $380 a share before ending the day close to $328 a share. Since then, Coinbase shares have settled at $235, down 28% year to date.
• Affirm priced its shares at $49, above its target range of $41 to $44. The company opened 98% higher at $90 a share before ending the day at around $97 a share. Since then, Affirm shares have settled at $64, down 33% year to date.
• Lemonade priced its shares at $29 a share. Lemonade opened above that target price at around $50 a share, soaring as high as $70 and ending the day at $69 a share. Since then, shares have grown to $89, up 28% year to date.
• Upstart priced its shares at $20, the lower end of its target range of $20 to $22. The company opened 30% higher at $26, before closing its debut at around $29. The company’s shares have grown 203% year to date to reach$133.

Overall, fintech IPOs have been a mixed bag — there does not appear to be a clear trend in share behaviors post-IPO. As such, it is difficult to fully predict how Robinhood’s shares will behave after it goes public. However, it does seem that the company is somewhat reasonably priced for its public debut.

Robinhood holds an edge over many of its competitors as it’s the preferred platform for many new investors. In fact, Robinhood believes that close to 50% of all new retail funded accounts in the US from 2016-2021 were created on its platform. Robinhood customers’ median age is 31 with 50% of the company’s customers also being first-time investors. Additionally, Robinhood has an incredibly strong brand despite its issues. A 2018 FINRA survey also showed that 30% of retail investors in the US place orders using a mobile app. Approximately 70% of Robinhood’s assets under custody (AUC) came from customers aged 18-40. All of these statistics paint a very rosy picture for Robinhood and suggest that Robinhood truly is the preferred platform among younger generations of investors.

There are also many opportunities for Robinhood to grow. Robinhood’s core product offerings focus on retail trading of equities, crypto trading, and cash management. Charles Schwab estimates US retail investors to have total assets of $50 trillion. Robinhood has $81 billion in AUC, so it currently holds less than 1% market share of all US retail assets. Additionally, retail investing comprises roughly 20% of US equity trading volume, doubling in the decade from 2010 to 2020. The cryptocurrency market has grown up to $1.66 trillion according to Coin Market Cap, up from $450 million when Robinhood launched its cryptocurrency service in February 2018. Lastly, Robinhood offers cash management services that allow users to earn 0.3% annual percentage yield on their uninvested funds and debit cards that allow users to use or withdraw those uninvested funds. A Nilson Report estimated that US prepaid and debit card purchase volume to be approximately $3.8 trillion. Needless to say, Robinhood has plenty of opportunities to grow its current product portfolio. 

Lastly, Robinhood currently only offers its services exclusively to US citizens with a legal address within the US and Puerto Rico. Total global wealth outside of the US is estimated to be at more than $200 trillion according to a Barron’s report. Although difficult, there are certainly opportunities for Robinhood to expand past US borders and offer its services in international markets. In fact, Robinhood planned to launch in the UK in 2020 but had to postpone due to the pandemic and other factors. 

Overall, Robinhood is well-positioned in multiple large markets. The company already has strong name recognition and currently boasts a large and young user base. There is plenty of room for the fintech company to keep expanding, especially as cryptocurrency continues to grow. If Robinhood is able to successfully break into international markets, it will likely experience explosive growth.

Vladimir Tenev and Baiju Bhatt are best friends and co-founders of Robinhood. They met as roommates while studying at Stanford and graduated with degrees in mathematics and physics, respectively. They later started to build trading software for hedge funds and banks. Tenev and Bhatt started two companies together prior to Robinhood — Celeris and Chronos Research — both of which were unsuccessful all together. These experiences informed them of the opportunity at hand which resulted in Robinhood. Needless to say, the two have done a remarkable job at executing to get Robinhood to where it is today. Their focus on building a simple, easy-to-use product with gamified features are reasons why Robinhood is the preferred choice for many new, young investors. 

Robinhood’s board of directors contains a diverse group of independent advisors as well as previous investors. Robinhood currently has seven board members with Vlad Tenev serving as Chair of the Board. Co-founder Baiju Bhatt also sits on the board. Other board members include Jan Hammer, Paula Loop, Jonathan Rubinstein, Scott Sandell, and Robert Zoellick.

Robinhood has built a well-designed, easy-to-use platform with a suite of financial services products. Robinhood’s main offering is its investing product which allows users to invest in US stocks, exchange-traded funds (ETFs), options, and American Depository Receipts (ADRs are securities listed on US exchanges that represent ownership in foreign companies). Robinhood’s additional products include cryptocurrency trading, cash management, and learning and educational services. In addition, Robinhood offers a premium subscription, Robinhood Gold, which grants subscribers premium features like bigger instant deposits, professional research from Morningstar, and more. Robinhood’s crypto trading product has no fees attached for trades but  also has a reputation for providing “inferior trade prices.” Robinhood’s cash management product is similar to other brokerages like SoFi, Personal Capital, and others. A quick summary can be found here.

Robinhood has woven a customer-first attitude into building products. The investing platform’s ease of use coupled with commission-free trading has created a low-friction product which has opened up investing to the retail investor. 

Robinhood’s commission-free trading truly disrupted the brokerage industry. Previously, stock trading through a brokerage came with unavoidable fees via commissions. By discarding commissions, Robinhood opened up trading to a generation of new investors who are cash-strapped. Combined with its simple, easy-to-use interface and several gamified features, Robinhood was able to appeal to an entirely new and large segment of the market. However, it is also important to note that essentially all brokerages have since embraced commission-free trading. Robinhood is no longer unique in this regard.

While gamification enabled Robinhood to create a very sticky product, it has also drawn strong criticism as a predatory feature. Before removing some of these features earlier this year, Robinhood would shower confetti on users who had referred friends, made their first trade, and more. These features prompted a complaint from Massachusetts regulators who cited the company’s “aggressive tactics to attract inexperienced investors, its use of gamification strategies to manipulate customers, and its failure to prevent frequent outages and disruptions on its trading platform.” The issue remains unresolved to this day.

In addition to its mobile app, Robinhood has also built a self-clearing system via Robinhood Securities, LLC (RHS). RHS enables the clearing and settling of trades across stocks, ETFs, and options without relying on a third-party clearing firm. The company also has an order routing system that uses statistical models based on past orders and execution quality data to automatically route customer orders to market makers that have historically given best prices. Lastly, the company has built a machine-learning platform used for fraud detection, customer support workflows, and personalized content recommendation. All in all, these products have created an efficient system that should enable a frictionless customer experience. 

Robinhood primarily generates revenue in three ways: transaction-based revenues (75.1% of 2020 revenues), net interest revenues (18.5%), and other revenues (6.4%). 

Transaction-Based Revenues

In order to provide commission-free trading, Robinhood’s transaction-based revenues rely heavily on payment for order flow (PFOF) in which Robinhood gets paid for routing customer orders for equities, options, and cryptocurrency to market makers. On equities and options trades, this is typically called payment for order flow. For cryptocurrency trades, this is known as transaction rebates. Robinhood’s split of transaction-based revenues in 2020 are as follows: 47% from options, 32% from equities, and 21% from crypto. Additionally, the majority of Robinhood’s transaction-based revenues come from three market-makers: Citadel Securities (34%), Susquehanna (18%), and Wolverine (10%). Robinhood’s reliance on PFOF is much-publicized, and the company has come under fire from regulators for failing to disclose and even misleading investors on how the majority of its revenue was generated. Robinhood was recently fined $70 million in late June 2021 for this behavior.

Net Interest Revenues

Robinhood’s net interest revenue is rather straightforward. The company primarily makes revenue in the form of interest on providing margin loans to users (55%) and allowing third parties to borrow securities, usually for shorting stocks (45%). 

Other Revenues

Robinhood also generates money from its subscription service — Robinhood Gold — which allows users to access Level II market data and to borrow for trading on margin. Although the smallest portion of its revenue comes from Robinhood Gold, the company has still seen strong growth in Robinhood Gold subscribers. These revenues grew 70% year-over-year, and subscriber count grew 350% from 0.2 million to 0.9 million. Total Robinhood Gold subscribers stood at 1.4 million as of March 31, 2021.

Other Key Metrics

The pandemic and 2021 memestock trading craze has fueled a ton of growth for Robinhood. Some of Robinhood’s 2020 metrics to consider include:

• Revenue grew 245% from $277.5 million in 2019 to $958.8 million in 2020, and revenue for Q1 2021 ended at $522.2 million.
• Net income went from -$106.6 million in 2019 to $7.4 million in 2020.
• Monthly active users (MAUs) grew 172% from 4.3 million in 2019 to 11.7 million in 2020.
• Average revenues per user (ARPU) grew 66% from $65.7 in 2019 to $108.9 in 2020.
• The daily active user to monthly active user (DAU/MAU) ratio is 47% (a measure for “stickiness”). This figure puts Robinhood nearly on par with social networks, where the DAU/MAU is often greater than 50%.

Robinhood has seen massive growth in both revenue and user count. It has proven the effectiveness of its business model and proven that commission-free trading can still be lucrative. Robinhood’s recent performance is quite impressive.

Robinhood runs into many of the same risks that many late stage companies do. There are numerous questions around whether or not the company can continue growing at its current pace in addition to revenue risk and regulatory risks. Investors should be keenly aware of the numerous regulatory and litigation risks associated with Robinhood.

Robinhood especially suffers from regulatory risks being in the US securities industry. The company’s recent S-1 filing highlights risks associated with its transaction-based revenues and risks associated with potential regulation surrounding payment for order flow (PFOF). A lawsuit concerning Robinhood’s PFOF practices was even filed against the company. 

Robinhood is also the subject of a number of class action lawsuits and investigations from state and federal regulators. While exhaustive to run through, it’s important for investors to note that a number of Robinhood’s business practices are the subject of litigation. If, for example, the laws surrounding payment for order flow were to ever be barred (quite unlikely), then Robinhood would be in serious danger. 

There is also some product risk associated with Robinhood because of various outages that occurred in March 2020. On March 2, 2020, Robinhood suffered a systemwide product outage  during the largest daily point gain in the Dow Jones’ history. This outage prevented users from performing most actions on the platform. Robinhood suffered another major outage just seven days later. Robinhood is facing three lawsuits due to the March 2020 outages.

In the most bearish case, investors may see a company with a bloated valuation that has several risks associated with it. At a proposed $35 billion valuation, Robinhood’s revenue-to-valuation multiple is 35x. That multiple is much higher than its peers in the financial brokerages space. Charles Schwab and Interactive Brokers, for example, have valuation to revenue multiples of 8x and 3x, respectively. 

Another major concern is whether Robinhood is a truly differentiated product. By this point, all brokerages have already adopted commission-free trading, so this selling point is no longer unique to Robinhood. While nicely designed, Robinhood’s core product offering of investing services is quite limited compared to other brokerages. Customers using Robinhood do not have access to retirement accounts, mutual funds, or bonds. The company also offers limited customer support. 

Robinhood has received a fair amount of negative press in 2021, due to multiple service outages and regulatory issues. These events can cause customers to lose trust and leave the platform. The company will need to counteract negative press while also doing its best to prevent future litigation — both tough tasks in a highly regulated and scrutinized market.

Lastly, Robinhood’s growth to date may not be sustainable. The pandemic has fueled a ton of retail investor interest and growth in the public markets. It’s very difficult to predict when that interest will fade, but it seems likely that it will at some point. Robinhood will need to have a plan for how it will handle slowed growth in the future. 

In aggregate, Robinhood may be a slightly overvalued and undifferentiated company severely at risk with regulators that saw an outlier year in terms of growth.

Robinhood’s growth numbers and metrics to date are absolutely outstanding. While the COVID-19 pandemic has fueled a ton of growth for the company, a 245% increase in revenue from one year to the next is impressive no matter the circumstances. 

Additionally, Robinhood is marketed towards and attracts an overlooked userbase that’s primarily young and often new to investing. These kinds of users are likely to be long-time customers if they have a positive experience with a product. Robinhood’s focus on ease of use and gamification features make its platform engaging while encouraging stickiness. Robinhood is the brokerage for new generations of investors.

There is a significant opportunity for Robinhood to grow internationally. While difficult to expand internationally, there are numerous retail investors in international markets that fit the same profile as Robinhood’s domestic user base. Retail investors across Europe and Asia are a massive opportunity that could provide significant revenue expansion.

Lastly, Robinhood acquires new customers in an organic and cost-efficient way with its Robinhood Referral Program. Approximately 80% of new funded accounts in 2020 and 2021 joined Robinhood’s platform organically or through the referral program. It can be expected that significant spend towards marketing can drive brand awareness even higher and thus fuel the company’s growth. 

Robinhood is a financial services and investing platform that’s focused on making investing easy and accessible for everyday investors. It pioneered the trend of commission-free trading, earning itself a place on the investing map. The company’s investing platform is simple, accessible, and uses gamification to attract and keep users. 

Robinhood has seen amazing growth, largely due to the pandemic. The company’s revenue grew 245% from 2019 to 2020 and monthly active users grew 172% in the same period. The brokerage firm market is quite large, and Robinhood still has plenty of room to expand. The company has positioned itself as the investing platform for the younger generation, and that value proposition appears to be resonating with many users.

However, Robinhood has drawn ire for its use of gamification, which some states and regulators say is a predatory design feature. Additionally, the company is no longer unique in offering commission-free trading. If its recent growth is primarily based on consumer behavior during the COVID-19 pandemic, a lack of differentiation may make continued growth untenable. Robinhood’s price in its initial public offering is $35 billion and results in a revenue-to-valuation multiple of 35x, which is rather overpriced in comparison to other public brokerage firms.

All in all, Robinhood has the potential to be a high-growth company, but it will need to overcome regulatory concerns and ensure users continue joining its platform to sustain its trajectory. Not only that, but Robinhood’s revenue streams are concentrated heavily on payment for order flow, a controversial practice. Despite being a modern brokerage for young professionals and new investors with high upside, there’s just too much risk and scrutiny on Robinhood. Therefore, Robinhood is a Neutral Deal.

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Analysis written by Francis Vu.