Gamestop – Robinhood Warns That the Trading Frenzy Won’t Last
Robinhood is seeking a lofty valuation for its stock, even as the company is warning investors that the surge in new investors fueling its growth is likely to slow.
The commission-free broker plans to offer shares to the public next week for $38 to $42 each, valuing it at roughly $35 billion. That would give the company a valuation of about 16 times revenue, assuming that it can continue its current quarterly rate of revenue for the rest of the year. But there are already signs that activity is slumping.
While meme-stock fervor helped push trading to record levels in the first few months of the year, it has been “returning to levels more in line with prior periods during the last few weeks of the quarter ended June 30, 2021, and remained at similar levels into the early part of the third quarter,” Robinhood said in an amended prospectus filed on Monday.
The filing also had encouraging news for fans of the company. Robinhood released preliminary second-quarter results that showed its client base continues to grow at a remarkable rate. It now has 22.5 million funded accounts, up from 18 million at the end of the first quarter and 12.5 million at the start of the year. That means that Robinhood added 10 million accounts in just six months. By comparison, E*Trade — which has been around for nearly 40 years — had 5.2 million total account holders when it was bought by
(MS) last year.
But Robinhood’s growth rate in both revenue and clients is likely to slow through the rest of the year. Trading had been buoyed by the
surge, cryptocurrency gains, and government stimulus checks. Stocks popular with retail traders like
AMC Entertainment Holdings
(AMC) have lately been declining, while Bitcoin is down 50% from its April highs. The federal government is still sending stimulus checks out, but they are more targeted now and are less likely to inspire a trading boom.
Robinhood’s preliminary financial estimates for the second quarter showed that some metrics have already flattened out. The company’s revenue is likely to come in between $546 million and $574 million. That’s an improvement from the $522 million in revenue the company made in the first quarter, but it is a deceleration. In the first quarter, revenue had more than quadrupled year over year. In the second, it’s likely to grow by about 130%. The company expects to post a second-quarter loss of $487 million to $537 million, compared with a $1.4 billion loss in the first quarter.
Robinhood did not release its average trading volume — an important metric given that most of its revenue is transaction-driven — but it noted that while options and crypto trading had risen, equities trading had declined from the prior year. Crypto trading may also slide soon.
Its third-quarter revenue is likely to trail second-quarter revenue “as a result of decreased levels of trading activity relative to the record highs in trading activity, particularly in cryptocurrencies, during the three months ended June 30, 2021, and expected seasonality,” the company’s filing said.
Other metrics are likely to decelerate too, Robinhood said in the filing. The company says it is likely to post a slower growth rate in assets under custody, total new funded accounts, and monthly active users.
Robinhood earns 75% to 80% of its revenue by taking a cut of the money market-makers earn by executing client trades, a controversial practice known as payment for order flow. If trading volume slows, that revenue source will dry up. At
(SCHW), the biggest discount broker, payment for order flow made up about 5% of revenue in 2020. When customers stop trading as much, Schwab can still make money in other ways, like lending out their deposits that are sitting in cash.
Robinhood says it will also expand its revenue options. Some investors may need more proof before they jump into the stock.
Write to Avi Salzman at [email protected]