Robinhood: Still Too Early to Invest

Robinhood: Still Too Early to Invest

Robinhood (HOOD) was founded in 2013 based on the belief that everyone should be able to participate in the worlds financial system. The company’s claim to fame was creating a modern financial services platform for everyone, regardless of their wealth, income, or background.

It was the pioneer in offering commission-free trading, which the rest of the brokerage industry subsequently adopted as well.

By the end of 2021, the company had accumulated over 22 million funded accounts with $98 billion in funded assets on their platform. Revenues for the last fiscal year increased to $1.8 billion.

I am neutral on Robinhood as the growth headwinds it is experiencing now may linger for quite some time.

Payment for Order Flow

Payment for order flow (PFOF) is the common practice in the brokerage industry where brokerage firms forward customer orders to high-frequency trading firms in exchange for “transaction rebates.” 

These rebates across equities, options and cryptocurrencies represent 75% of Robinhood’s total revenues for 2021. TD Ameritrade is the largest PFOF revenue generator, with Robinhood being the second largest.

In 2011, the SEC said in August that a full-scale ban on PFOF is on the table. This is based on its opinion that these transactions represent “an inherent conflict of interest.” 

PFOF became a major revenue source for most brokerage firms as the advent of commission-free trading took hold. However, as of today that ban has not happened, and is unlikely to occur.

Initial Public Offering

Robinhood went public on August 2, 2021, selling 55 million shares of Class A common stock at a price of $38 per share. 

The total net proceeds raised in the IPO were approximately $2.05 billion. The stock now trades about 70% below its IPO price.

Financial Review

For 2021, total revenues increased 89% to $1.82 billion as transaction-based revenue skyrocketed 95% due to the large amount of new accounts acquired during the year. 

Options increased 57%, and represented 62% of transaction revenues. Equity trading increased 15%, and makes up 19% of revenues. Cryptocurrency trading increased almost 20-fold, and now comprises 18% of transaction revenues.

The company still generates large operating losses, particularly when considering the high amounts of stock compensation being expensed, which will continue this year.

Other important metrics include Monthly Active Users (MAUs) which increased 48% to 17.3 million as of December 2021, compared with 11.7 million as of December 2020. On a sequential basis, MAU decreased 9% compared with 18.9 million for September 2021.

In addition, Assets Under Custody (AUC) increased 56% to $98 billion as of December 31, 2021, compared with $63 billion as of December 31, 2020. On a sequential basis, AUC increased 3% compared with $95 billion as of September 30, 2021.


The company is not expected to be profitable until 2025, according to some analysts. In addition, revenues in 2022 are expected to be flat, or fall, as the 2021 COVID-19 home-based boost fades away. 

The company will likely continue to burn its capital in a significant way until profitability is reached, making it difficult to value at this time. The company is currently selling for about 5x revenues at this point.

Wall Street’s Take

Turning to Wall Street, HOOD has a Hold consensus rating based on five Buy ratings, five Hold ratings, and two Sell ratings assigned in the past three months. At $19, the average HOOD price target implies 58.3% upside potential.


This once-in-a-lifetime trading style bull market, combined with COVID-19 lockdowns has benefited Robinhood immensely. 

These things will likely reverse course at some point and provide headwinds for HOOD stock going forward. The stock will probably tread water in this range for some time until market conditions improve or profitability is achieved.

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