Evaluating Robinhood in the Public Market
In 3Q 2019, Robinhood achieved a major milestone, growing to a point where the Company acquired more than 50% of the monthly active user share in the broker dealer industry with 10 million MAUs. This rapid user growth continued, growing to 13 million MAUs in the first half of 2020 and leading to a new funding round at a $10.2 billion valuation. I believe Robinhood could achieve a valuation of $48 — $180 Bn over the next 5 years.
Robinhood vs. Schwab
In reviewing the metrics above, Robinhood and Schwab are valued at nearly identical multiples of revenue, demonstrating the Venture market is valuing Robinhood in line with public markets. We can also see that Schwab is monetizing its customer base at 8.14x Robinhood. As Robinhood approaches a public offering, investors need to consider whether or not Robinhood can close the revenue gap vs its largest peer. I believe there is ample opportunity for this going forward based on the following:
· Robinhood has a long runway available to incorporate banking and subscription services in the coming years. Currently, most revenue is generated through paid order flow volume, the gold subscription model, and securities lending. Robinhood credit card, payment, personal lending, mortgage, and wealth management services can enhance monetization of the user base dramatically over time.
· The average Robinhood account balance is only $1,000-$5,000 compared to ~$240,000 for the average Charles Schwab account. Robinhood account balances should outgrow traditional brokers in the coming years as millennials begin to hit their peak earnings years and inherit wealth from Baby Boomers. Growth in investment accounts will create a larger asset base that will make banking services more economical, lead to larger trading volumes and provide a larger wallet for subscription services.
· Robinhood has built out an early crypto trading platform, which will likely be a requirement for any successful investment platform in the future. In 4 years, the market for trading bitcoin alone may become larger than stocks. Robinhood also has ample opportunity to grow listed crypto assets once the SEC provides further regulatory clarity. Only 7 digital assets are supported at this time.
· The composition of the workforce should also give Robinhood a favorable edge over its competitors as we see more growth in the Gig Economy, entrepreneurship, and digitally native businesses that do not provide a traditional IRA.
Key Risks to Growth can be Mitigated
Robinhood faces some business risks that could potentially limit its ability to capitalize on these opportunities. Mitigation of these risks seem achievable.
Balance Innovation with Keeping the Regulators Happy
As an innovator, there is a difficult balance between pushing the envelope and appeasing regulators who may have views that are consistent with the established incumbents in an industry. Robinhood can alleviate regulatory concerns by putting in place better risk and control practices on margin trading, account approval processes, enhancing financial education services, and building up further server capacity so application crashes and operational risks have limited impact on user experience and investment performance.
Competition from other Digitally Native Platforms
As Robinhood looks to further monetize its customer base, they will face competition from other digital platforms. For example, Square is a dominant platform in the payments and banking space today, but has already built out support for Bitcoin and stock trading on the Cash App. I expect competition amongst digitally native platforms to heat up as Fintech companies look to monetize their user base. Despite this competition, I believe it is more likely competition amongst digitally native peers will form a symbiotic relationship that lifts all boats as 55% of consumers have relationships with multiple financial service providers, according to Forrester Consulting.
Great, so what does this mean for the Stock?
A lot of value has already accrued to Robinhood shareholders through multiple private rounds of funding, so is there anything left for the public market investor? We will need to see the S-1 first, but current trends would indicate there is a lot of value accrual remaining.
Scenario Analysis: Robinhood Marketcap in $Bn in 2025 based on ARPU and Profit Margin
Scenario Analysis: 5-Year CAGR
Reviewing the Scenario analysis, Robinhood should be able to scale its business to a point where it can generate a net profit margin in line with Schwab, and will likely exceed this margin due to its lower cost structure. If Robinhood is able to monetize its customer base in line with Schwab over the next 5 years, we could see a marketcap of $48 — $180 Bn. Depending on investor appetite for the IPO, we can see Robinhood could provide a great opportunity for investors to capitalize on Fintech innovation.
Note: This is not financial advice and you should refer to the Robinhood S-1 and Prospectus to verify key performance metrics. Please consult a financial advisor before making investment decisions.
