The trading app Robinhood is going public, and filed its S-1 with the SEC.
Here’s what I learned from their disclosures:
• Robinhood has 18 million funded accounts and $81 billion of assets under its custody
• It plans to trade under the ticker, “HOOD”
• It’s going to reserve between 20 and 35% of its Class A shares for Robinhood customers
Robinhood has 3 classes of stock:
• Class A shares (1 vote each). This is the stock being offered in the IPO
• Class B shares (10 votes each). This is held by the two founders of Robinhood
• Class C shares (no voting rights)
Robinhood pioneered commission-free trading, so you might be wondering how it makes money. Robinhood has 3 sources of revenue:
1. Transaction-based revenues
2. Net interest revenues
3. Other revenues
81% of total revenue in the first quarter of 2021 came from transaction-based revenues.
This is revenue “earned from routing customer orders for options, equities and cryptocurrencies to market makers.”
• When a user buys or sells a stock, Robinhood needs to route the order to a market maker who will execute the order. The market maker then pays Robinhood a portion of the bid-ask spread. In short, the market maker is paying Robinhood for sending trades their way
• The market maker Robinhood used the most was Citadel Securities, which accounted for about one-third of Robinhood’s transaction-based revenues
• When it comes to trading stocks/options, these fees are called “payment for order flow”
• When it comes to trading cryptocurrencies, these fees are called “transaction rebates”
About 12% of Robinhood’s total revenue came from interest in the first quarter of 2021.
• Robinhood earns interest on margin loans, securities lending, and deposits
The remaining 7% of Robinhood’s total revenue came primarily from Robinhood Gold, a paid subscription service that gives users access to premium features.
In total, Robinhood generated $137 of revenue per user in the first quarter of 2021
• That’s a 65% increase from the same quarter in 2020
• And Robinhood’s top-line revenue quadrupled over the same time period
But is Robinhood profitable?
• Well, it posted a $7 million profit for the 2020 fiscal year
• But it lost $1.4 billion during the first quarter of 2021
The loss was due to a single line item: a $1.5 billion expense due to a fair value adjustment of convertible notes and warranty liabilities.
If you ignore the fair value adjustment, Robinhood about broke even in the first quarter of 2021.
But because Robinhood has had such strong top-line revenue growth, a lot of investors are excited about its stock.
But the company faces multiple risks, including:
1. Regulation
2. Increased competition
3. Conflicts of interest due to its business model
Robinhood benefited greatly from COVID-19, the stay-at-home orders, and government stimulus payments that gave retail investors extra money to put in the market.
But it’ll be interesting to see if Robinhood’s business model can achieve high profits in the long run.
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