1/ If the Robinhood S-1 is going to hit this week per the press speculation, then I’ll put this out before the inevitable substack S-1 copy pastes and shadow IR write ups.
From the perspective of a financials specialist, this is what I think key issues will be.
From the perspective of a financials specialist, this is what I think key issues will be.
2/ Robinhood IPO’ing at the peak of retail trading activity.
Two examples below of Schwab and Tradestation activity shows how elevated activity is.
Two examples below of Schwab and Tradestation activity shows how elevated activity is.
3/ Question will be where the new normal shakes out. Due to free trading since 2019, looking at SCHW/AMTD/ETFC historical activity levels isn’t a useful guide but nor is extrapolating recent activity levels.
Looking at SCHW weekly trading volumes and its been slowing since Feb
Looking at SCHW weekly trading volumes and its been slowing since Feb
4/ Average account sizes at Robinhood are tiny compared to incumbents ($5k vs $100k at ETFC).
Bears will argue they have the small crappy accounts nobody else wants.
Bulls will say it’s a massive long term NNA growth tailwind as customers age and accumulate more wealth.
Bears will argue they have the small crappy accounts nobody else wants.
Bulls will say it’s a massive long term NNA growth tailwind as customers age and accumulate more wealth.
5/ PFOF will be a big debate among investors.
In my time investing in online brokers since flash boys came out, any bad PFOF headlines always dragged the stocks down, especially Ameritrade, who were most reliant on PFOF and trading volume.
In my time investing in online brokers since flash boys came out, any bad PFOF headlines always dragged the stocks down, especially Ameritrade, who were most reliant on PFOF and trading volume.
6/ I’ve analyzed exchanges and online brokers for a decade. PFOF noise has always been around and so I don’t believe it is going to get banned.
The regulator has already addressed it via better disclosure.
Regardless, any headlines will be very impactful on the share price.
The regulator has already addressed it via better disclosure.
Regardless, any headlines will be very impactful on the share price.
7/ Financials investors used to penalize Ameritrade for being heavily exposed to transaction revenue relative to Schwab, who is more dependent on NII and fees.
Robinhood has a gold subscription product but in all likelihood it will be a tiny % of revenues. Same with NII.
Robinhood has a gold subscription product but in all likelihood it will be a tiny % of revenues. Same with NII.
8/ I expect they will carve a narrative out of growing their debit card, subscription revenues, and development of some fee-based products to move away from being so transaction revenue heavy.
9/ Investors own retail brokers for rate sensitivity as they earn a spread on client cash.
Due to the low customer account sizes and probability that cash as % of assets will be low, Robinhood isn’t going to be a rate play like SCHW is.
Due to the low customer account sizes and probability that cash as % of assets will be low, Robinhood isn’t going to be a rate play like SCHW is.
10/ On valuation, a lot of the idiots on here will extrapolate Q1 and apply a stupid revenue multiple of payments companies or SaaS to come to a ‘fair value’ for Robinhood.
News reports say $30bn value and prediction markets say it’ll open at $60bn.
News reports say $30bn value and prediction markets say it’ll open at $60bn.
11/ On my estimates the range implies value per account of $2k-$4k.
Today SCHW trades on $4k per account but for revenue per account many many multiples that of Robinhood today.
Today SCHW trades on $4k per account but for revenue per account many many multiples that of Robinhood today.
12/ Other comps:
Tastytrade acquired in Jan at $9k per acc.
eToro SPAC deal announced at $8.6k per acc.
Last week euro neobroker Trade Republic raised at a valuation of $5k per account.
Robinhood will likely IPO at a HUGE revenue multiple premium to all of these comps.
Tastytrade acquired in Jan at $9k per acc.
eToro SPAC deal announced at $8.6k per acc.
Last week euro neobroker Trade Republic raised at a valuation of $5k per account.
Robinhood will likely IPO at a HUGE revenue multiple premium to all of these comps.
13/ Here’s my stab at the bull/bear case.
Bull case (likely TMT ppl):
- Superior customer UX and innovation vs incumbents
- #1 retail broker for younger demographics and incumbents can’t catch up
- Solid unit economics (very low CAC and low churn) and margins
Bull case (likely TMT ppl):
- Superior customer UX and innovation vs incumbents
- #1 retail broker for younger demographics and incumbents can’t catch up
- Solid unit economics (very low CAC and low churn) and margins
14/
- VERY long NNA growth runway as young users get wealthier
- Lots of monetization levers (fee based products, debit cards, rate upside, securities lending, pivot to banking, payments, insurance etc)
- PFOF not going away
- International expansion
- Cheap on EV/rev vs growth
- VERY long NNA growth runway as young users get wealthier
- Lots of monetization levers (fee based products, debit cards, rate upside, securities lending, pivot to banking, payments, insurance etc)
- PFOF not going away
- International expansion
- Cheap on EV/rev vs growth
15/ Bear case (financials investors)
- Trading activity normalizes to significantly lower levels
- Too tx heavy
- Customers will move brokers when they get wealthier
- Competition heats up (bonus offers, PFOF rebates and higher marketing)
- Structurally lower margins than peers
- Trading activity normalizes to significantly lower levels
- Too tx heavy
- Customers will move brokers when they get wealthier
- Competition heats up (bonus offers, PFOF rebates and higher marketing)
- Structurally lower margins than peers
16/
- Inability to enhance monetization / these small accounts will always be small
- PFOF gets banned and other regulatory actions limiting retail options trading and gamification
- International expansion doesnt work as PFOF is banned in Europe/Australia
- Valuation is insane
- Inability to enhance monetization / these small accounts will always be small
- PFOF gets banned and other regulatory actions limiting retail options trading and gamification
- International expansion doesnt work as PFOF is banned in Europe/Australia
- Valuation is insane
17/
Let me throw out a wild thought here. If PFOF gets banned, instead of charging commissions, Robinhood could address the issue by starting their own trading operation and internalize all the flow.
This is notoriously difficult however.
Let me throw out a wild thought here. If PFOF gets banned, instead of charging commissions, Robinhood could address the issue by starting their own trading operation and internalize all the flow.
This is notoriously difficult however.
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