Robinhood (HOOD 0.70%) and Affirm (AFRM -0.45%) are both high-growth fintech companies that aspire to disrupt legacy financial institutions. Robinhood's introduction of commission-free stock and cryptocurrency trades attracted a new generation of retail investors and forced traditional brokerages to eliminate their fees. Affirm is challenging credit card companies with a BNPL (buy now, pay later) payment network that breaks larger purchases into smaller monthly payments.
Both stocks are volatile. Robinhood went public at $38 per share in July, surged to $85 in August, and then tumbled back to about $40 as investors fretted over its regulatory challenges. Affirm went public in January at $49 per share. It soared to $146.50 the following month, pulled back to its IPO price in May, and jumped to about $110 after revealing a new partnership with Amazon (AMZN -0.16%).
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Should investors consider buying either of these fintech stocks? Let's take a fresh look at both companies, their growth rates, and valuations to find out.
Both companies target younger users
Robinhood and Affirm both target younger users who are less likely to be locked in by traditional brokerages and credit card companies, respectively. In its IPO filing, Robinhood revealed that 70% of its assets under custody came from users between the ages of 18 to 40, with a median age of 31. Affirm's IPO filing revealed that 48% of its customers were Millennials.
Robinhood subsidizes its free stock trades by selling its orders to market makers like high-frequency trading (HFT) firms, which profit from the bid-ask spread of each order. This "payment for order flow" (PFOF) model is controversial: critics claim it prevents investors from getting the best price, while the proponents argue that HFT firms can secure better prices with bulk orders than smaller direct orders from public exchanges -- so it's actually a "win-win-win" deal for the investor, Robinhood, and the HFT firm.
Affirm works with retailers that don't want to pay credit card companies 1% to 3% "swipe fees" for each purchase. Its BNPL services also run faster than the sluggish ACH (automated clearing houses) that large retailers use for their private-label payment cards. Affirm provides both interest-free and interest-bearing payments (depending on the retailer's preference), it doesn't charge any additional fees, and its mobile app enables consumers to track their payments and locate other Affirm-accepting retailers.
Both companies are growing rapidly
Robinhood's revenue surged 245% to $959 million in 2020, while its number of monthly active users (MAUs) jumped 172% to 11.7 million. In the first half of 2021, Robinhood's revenue rose another 193% year-over-year to $1.09 billion, while its MAUs grew 109% to 21.3 million.
That breakneck growth, which was partly fueled by the surging interest in "meme stocks" and cryptocurrencies among retail investors, puts it in striking distance of top-tier traditional brokerages like Charles Schwab, which hosts 32.4 million active brokerage accounts.
Affirm's revenue rose 71% to $262 million in fiscal 2020, which ended on June 30, while its number of active customers nearly doubled to 7.1 million. Its number of active merchants surged 412% year-over-year to nearly 29,000, partly driven by a new partnership with Shopify that enabled smaller merchants to provide BNPL services.
Affirm's new partnership with Amazon, which will gradually integrate its BNPL services over the next few months, could tether even more merchants and shoppers to its expanding ecosystem.
For the current fiscal year, analysts expect Robinhood's revenue to rise 108%, and for Affirm's revenue to grow 34%. Based on those estimates, Robinhood trades at 17 times this year's sales, while Affirm trades at 25 times this year's sales. Neither company is profitable yet.
Both companies face near-term challenges
Robinhood looks cheaper than Affirm, but it faces significant near-term challenges, including a push by lawmakers and regulators to ban the PFOF brokerage model in the United States.
An outright ban could cripple Robinhood, but I think it's highly unlikely since most traditional brokerages -- including Schwab and its subsidiary TD Ameritrade -- also use PFOF to subsidize free trades.
Investors are willing to pay a higher premium for Affirm thanks to its recent deal with Amazon, but it's too early to tell if that partnership will significantly boost its revenue this year. Amazon's BNPL rollout could be slower than anticipated, or it could still partner with Affirm's competitors in other markets.
Affirm also suffers from customer concentration issues. Its top customer, Peloton, faces tough post-pandemic comparisons and a growing number of cheaper competitors.
The winner: Robinhood
I expect both stocks to remain volatile for the rest of the year, but I believe Robinhood is a better buy than Affirm right now, for three reasons.
First, Robinhood faces fewer direct competitors than Affirm, which still needs to deal with Square and PayPal's ongoing expansion into the BNPL market. Second, Robinhood is growing faster than Affirm, but its stock is significantly cheaper.
Lastly, I believe Robinhood will overcome the near-term regulatory challenges and overcome its growing pains as a public company. When that happens, its stock could command a much higher valuation again.
