Robinhood Markets (NASDAQ:HOOD) made its long-awaited public debut at $38 per share on July 29, but the stock opened at just $33.35 and ended its first trading day at $34.82. Ongoing concerns about Robinhood's business model seemingly overshadowed its impressive growth rates.
Robinhood's disappointing debut might remind investors of another hot fintech company, Coinbase Global (NASDAQ:COIN), which went public via a direct listing this April. Coinbase set a reference share price of $250 and opened at $381 on the first trade, but is now trading in the $230s.
Robinhood and Coinbase benefited from similar secular tailwinds. Robinhood generated explosive growth by disrupting traditional brokerages with free stock and cryptocurrency trades. Coinbase, the largest crypto exchange in the U.S., also benefited from the public's growing interest in cryptocurrencies.
How fast is Robinhood growing?
Robinhood's revenue surged 245% to $958.8 million in 2020. Transaction-based revenue accounted for three-quarters of its top line, while the rest mainly came from interest on its margin loans and security lending, as well as subscription fees for Robinhood Gold.
Most of Robinhood's transaction revenue comes from payments for order flows (PFOF), or the sale of its clients' orders to high-frequency trading firms. Instead of purchasing stocks for its users on a public exchange, Robinhood sells its orders to a firm that profits from the bid-ask spread. That practice might sound shady, but other retail brokerages -- including Morgan Stanley's E*TRADE and Charles Schwab -- use the same business model to cover their "free" trades.
In the first quarter of 2021, Robinhood's revenue surged 303% year over year to $522.2 million. Its number of funded accounts increased 150% to 18 million, its monthly active users grew 106% to 17.7 million, and its average revenue per user rose 65% to $137.
It's tremendously popular with younger investors: Approximately 70% of Robinhood's assets under customers (AUC) came from users between the ages of 18 to 40. It generated 17% of its revenue from cryptocurrency trades during the first quarter, up from just 4% a year earlier.
Robinhood squeezed out a net profit of $7.4 million in 2020, compared to a net loss of $106.6 million in 2019. But in the first quarter of 2021, its net loss widened year over year from $52.5 million to $1.44 billion, mainly due to the higher fair value of its convertible notes and warrant liabilities. A large portion of those notes were issued to keep it solvent during the Reddit-fueled trading frenzy earlier this year.
How fast is Coinbase growing?
Coinbase's platform enables investors to buy a wide range of popular cryptocurrencies, store them in online wallets, and link their holdings to Visa-branded debit cards. It also provides crypto-processing services for businesses and a digital stablecoin called USD Coin, which is pegged to the U.S. dollar.
Coinbase generates nearly all of its revenue from transaction fees. Its revenue jumped 144% to $1.28 billion in 2020, its trading volume rose 142% to $193.1 billion, and it generated a net profit of $322.3 million -- compared to a net loss of $30.4 million in 2019.
In the first quarter of 2021, Coinbase's revenue soared a whopping 843% year over year to $1.8 billion, its trading volume jumped more than tenfold to $335 billion, and its number of monthly transacting users increased 369% to 6.1 million. Its net income skyrocketed from $32 million to $771 million.
Coinbase's growth rates are undeniably impressive, but the recent sell-off in Bitcoin and other cryptocurrencies has raised troubling questions about the company's future. If the cryptocurrency meltdown continues, Coinbase's existing users might liquidate their holdings -- and it could become much more difficult to gain new users.
Coinbase also faces intense competition from other cryptocurrency trading platforms like Robinhood, Square's Cash App, and PayPal. All three of those companies are better diversified than Coinbase, which remains an all-in bet on the crypto market.
The valuations and verdict
Robinhood was valued at $29 billion, or 30 times last year's sales, after its market debut. It expects its revenue to grow 124%-135% year over year in the second quarter, and for its MAUs to rise to about 21.3 million.
Robinhood didn't provide any guidance beyond the second quarter, but it wouldn't be surprising if it doubled its revenue this year. Assuming it's actually trading at 15 times this year's sales, it would actually be cheaper than many other tech stocks generating slower revenue growth.
Analysts expect Coinbase's revenue to rise 392% to $6.3 billion this year, but that estimate is based on extremely bullish expectations for the crypto market. If it can hit that target, the stock would only be trading at just 10 times this year's sales -- which makes it even cheaper than Robinhood.
That said, I'd still rather buy Robinhood over Coinbase because it's better diversified, it's locking in a growing number of Gen Z and Millennial investors, and it will likely overcome its near-term growing pains. Coinbase looks tempting, but it's a risky all-in bet on cryptocurrencies pinned to unreliable expectations.