Robinhood at $0 would start to look cheap

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5 minute read

The logo of Robinhood Markets, Inc. is seen at a pop-up event on Wall Street after the company's IPO in New York City, U.S., July 29, 2021. REUTERS/Andrew Kelly

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NEW YORK, June 27 (Reuters Breakingviews) - Robinhood Markets’ (HOOD.O) reversal of fortunes has been dramatic. The digital brokerage went public in July with a valuation of $32 billion, yet by last Friday, its worth was just $7 billion. Strip out cash on its balance sheet, and Robinhood has at various points in the past month been worth less than zero. No wonder at least one potential acquirer is circling read more .

The reason for Robinhood’s slump is simple: Trading by its customers has slowed dramatically. Revenue of $299 million in the latest quarter was almost half what it was when Robinhood came to market. Many of the mostly-young stock pickers and cryptocurrency investors it targets have borne large losses from the market’s selloff in 2022. As prices of gas, food and rent rise, some will find the cash they used to invest on the platform is needed elsewhere.

But just as Robinhood benefited from the upward momentum of the markets, it may be getting too harshly punished for the downward slide. The company still has customers with a total of around 22.8 million recently-transacted accounts. Its plan is to offer them other kinds of financial products, like crypto wallets, bank accounts and debit cards.

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Other companies, if they owned Robinhood’s customers, might be able to do that too, but better. FTX, a cryptocurrency exchange founded by Sam Bankman-Fried, is considering how to make a bid, Bloomberg News reported on Monday. Two other firms that could make good use of Robinhood’s band of retail traders are its own former underwriters, Goldman Sachs (GS.N) and JPMorgan (JPM.N), both of whom offer various savings and wealth products.

Moreover, fears that Robinhood’s revenue would crater if users abandoned it seem overblown. It’s fair to assume Robinhood follows the 80-20 rule generally true for brokerages, whereby the bulk of revenue comes from the minority of customers. Based on a back-of-the-envelope calculation, that would mean around 5 million of its user accounts each produces $280 of revenue per year, whereas the remaining 18 million bring in just $18 on average.

Even if those small-time users drift away, revenue wouldn’t fall proportionately. Based on that lower value-per-account, even if Robinhood lost one in five of its more recreational users, all else being equal, the company’s overall top line would fall by just 4%. Robinhood could offset that by growing the revenue its average top-end user brings in by 5%.

Say Robinhood’s revenue stays steady over the next few years. If a buyer were to pay five times revenue – roughly what Morgan Stanley (MS.N) paid for rival brokerage E*Trade Financial in 2020 – Robinhood would be worth around $8 billion, more or less where it ended up after news on Bankman-Fried’s interest broke on Monday.

A buyer would still need a strong stomach. Robinhood’s revenue mostly comes from selling on its customers’ trading instructions to market makers, who execute them and pay Robinhood a fee – a kind of revenue that the Securities and Exchange Commission is perusing for potential conflicts of interest. Still, only 12% of the company’s top line comes from so-called payment for order flow from equities trading, the part that’s most under threat. Cryptocurrencies have taken a beating, and it’s possible that business shrinks further.

There’s solace, at least, to be found in that $6 billion cash pile, which is separate from the theoretical value of the brokerage itself. That would give an acquirer a war chest to use on souping up Robinhood’s products, settling some of the “numerous litigation matters” and regulatory probes referenced in the company’s filings or remotivating employees whose stock awards have withered since the company’s valuation glory days.

One of those employees might be founder Vlad Tenev. His generous incentive package is linked to the share price, but to achieve his maximum payout of $4.7 billion, Robinhood’s shares would eventually have to increase to $300 – around 30 times their level on Monday – and stay there. With little chance of hitting those compensation highs, it wouldn’t be a stretch to think Tenev is getting more receptive to constructive conversations.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Sam Bankman-Fried's FTX crypto exchange is exploring whether it might be able to acquire Robinhood Markets, Bloomberg News reported on June 27, citing people with knowledge of the matter.

Robinhood shares rose 14% to $9.12 by the close of trading. The previous trading day they had closed at $8 on June 24, down 90% from its peak in August 2021.

The digital brokerage, which allows users to trade stocks, options and cryptocurrencies, went public in July 2021 at a share price of $38.

The Securities and Exchange Commission is considering enforcing changes to the way some brokerages, including Robinhood, sell customers’ orders to market makers in return for fees, a practice known as payment for order flow.

Chief Commissioner Gary Gensler said in a speech on June 8 that one option might be to require brokerages to auction customer orders to the highest bidder.

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Editing by Lauren Silva Laughlin and Amanda Gomez

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