Robinhood Markets (HOOD 2.50%) and Coinbase Global (COIN 4.68%) both disappointed a lot of investors over the past year. Robinhood's stock closed at an all-time high $70.39 last August, but it now trades at just over $10 a share. Coinbase's stock hit an all-time high of $357.39 last November, but its shares are now worth less than $60.
Both stocks crashed for similar reasons. Their trading platforms initially attracted legions of investors during the buying frenzy in growth stocks, meme stocks, and cryptocurrencies throughout 2021, but they lost their luster as rising interest rates crushed those speculative investments. But could either of these broken fintech stocks stage a comeback over the next few quarters? Let's take a fresh look at their business models, near-term challenges, and valuations to decide.
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Robinhood is starved for active traders
Robinhood popularized commission-free trades for stocks, options, and cryptocurrencies. It accomplished that by selling its clients' orders to high-frequency trading firms, which profit from the bid-ask spread of each order. That "payment for order flow" business model was closely scrutinized by the Securities and Exchange Commision (SEC) over the past year, but the agency recently decided against completely banning the practice.
Robinhood's monthly active users (MAUs) peaked at 18.9 million in the third quarter of 2021, but it dropped to just 12.2 million in the third quarter of 2022. Its number of net cumulative funded accounts still rose from 22.4 million to 22.9 million during that period, but its total assets under custody (AUC) plunged from $95.4 billion to $64.6 billion. This implies the average size of each Robinhood account fell from $4,259 to $2,821. That slowdown can be attributed to the lack of new stimulus checks, the end of the meme stock mania, and the market's waning interest in cryptocurrencies.
Robinhood's revenue surged 89% to $1.82 billion in 2021, but subsequently plunged 33% year over year to $978 million in the first nine months of 2022. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) declined 78% to $34 million in 2021, then sank to a loss of $176 million in the first nine months of 2022, even as it implemented aggressive cost-cutting measures to cushion the blow of its declining revenue. Analysts expect the online brokerage's revenue to decline 24% to $1.37 billion for the full year, with an adjusted EBITDA loss of $91 million.
Coinbase is bracing for a crypto winter
As one of the largest cryptocurrency exchanges in the world, Coinbase generates most of its revenue by charging transaction fees for crypto trades. Therefore, Coinbase is much more of a "pure play" on the crypto market than Robinhood, which only generated 14% of its total revenue from cryptocurrency transactions in its latest quarter.
That's why many investors seemingly lost hope in Coinbase after CEO Brian Armstrong told investors to brace for another "crypto winter" this June. That severe downturn in the cryptocurrency market -- which was largely driven by rising interest rates, the flight from riskier assets, regulatory headwinds, and the implosions of several high-profile tokens -- caused Coinbase's average monthly transacting users (MTUs) to tumble from a peak of 11.4 million in the fourth quarter of 2021 to just 8.5 million in the third quarter of 2022. Between those two quarters, its quarterly trading volume plunged 71% as the total assets on its platform shrank 64% to $101 billion.
In 2021, Coinbase's revenue skyrocketed 545% to $7.36 billion as its adjusted EBITDA surged 676% to $4.09 billion. But in the first nine months of 2022, its revenue fell 48% year over year to $2.54 billion and its adjusted EBITDA slipped to a loss of $247 million -- even after it laid off nearly a fifth of its workforce earlier this year. Analysts expect its revenue to decline 59% to $3.2 billion this year, with an adjusted EBITDA loss of $424 million.
Which fintech stock has a better shot at a comeback?
Robinhood and Coinbase both face brutal near-term headwinds, but Robinhood's more diverse mix of options, equities, and cryptocurrencies should partly insulate it from the crypto winter that threatens to completely freeze Coinbase's core business. That said, Robinhood still faces stiff competition from other online brokerages, which also offer commission-free trades, while the ongoing bear market could discourage investors from ramping up their investments.
Both stocks were crushed over the past year, but neither one is trading at a bargain-bin valuation yet. Based on their current enterprise values, Coinbase and Robinhood trade at 3.5 and 4.6 times this year's sales, respectively. They both might seem cheaper than a traditional brokerage like Charles Schwab (SCHW 1.31%), which trades at 7 times this year's sales, but Schwab is also firmly profitable and generating more stable revenue growth.
I wouldn't rush to buy either of these fintech stocks right now. But if I had to choose one over the other, I'd definitely pick Robinhood instead of Coinbase. Coinbase might eventually benefit from the long-term recovery of the crypto market, but I'd rather simply buy a top cryptocurrency to profit from that turnaround instead of betting on an entire crypto exchange.
