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Robinhood IPO | S-1 Breakdown

By 

Max Motschwiller

Jul 7, 2021

Company Overview

Robinhood, a modern financial services platform, filed for a $100M IPO. That $100M figure is a placeholder and is likely to rise by the time the company prices their IPO. Goldman Sachs is leading the IPO and Robinhood plans to trade on the Nasdaq Stock Market under the ticker “HOOD.” Robinhood’s IPO comes on the heels of the Coinbase direct listing and much public and regulatory attention. Robinhood’s mission, “to democratize finance for all” reads bold through the S-1 as does their focus on design and creating products that users love. Vlad Tenev (CEO) and Baiju Bhatt (Chief Creative Officer) founded Robinhood in 2013 starting with a product that pioneered commission-free stock trading and have continued to expand its footprint into lowering the friction for consumers to access other financial assets (e.g. cryptocurrencies) and financial products (e.g. Cash Management & Margin). Over time, Robinhood claims to "strive to be the most trusted, lowest cost and most culturally-relevant money app worldwide.”

Robinhood has grown its revenue to $958.8M in 2020, up 245% YoY with 12.5M net cumulative funded accounts, up 145% YoY. The company ended the Mar-21 quarter with $522.2M of revenue, up 309% YoY and 18.0M net cumulative funded accounts, up 150% YoY. In addition to exceptional growth, Robinhood’s customer acquisition, payback, ARPU and retention are very impressive, which has translated into positive non-GAAP operating income for three of the last four quarters and $114.8M of adjusted EBITDA in Q1-21.

Robinhood’s innovative model of commission-free stock trading has not come without controversy including questions from the public and regulators on its payment for order flow (PFOF) business model, trading + product outages and minimum capital requirements. During the “memestock” hype in late January into early February 2021, Robinhood had trading outages on major stocks like GameStop and AMC and increased capital requirements from National Security Clearing Corporation (NSCC), which led Robinhood to raise over $3 billion in two convertible notes in February of this year. Just last week, Financial Industry Regulatory Authority (FINRA) fined Robinhood $70 million for outages and misleading customers, the largest-ever FINRA penalty.

Robinhood is headquartered in Menlo Park, CA and has 2,100 full-time employees worldwide. The company was incorporated in 2013 as Robinhood Markets, Inc.

Product & Technology

Robinhood’s platform offers a suite of financial services products including:

Investing Solutions

Robinhood’s main product offering is investing in (1) U.S. listed stocks, (2) Exchange Traded Funds (ETFs) (3) Options and (4) American Depositary Receipts (ADRs), all from a smartphone. Notably, the trading product also includes (1) fractional shares, which enables all customers—regardless of budget—to build a diversified portfolio and access stocks that may previously have been out of reach and (2) recurring investments, which help customers make investing a routine and employ dollar-cost averaging and (3) IPO access.

Cryptocurrency

Robinhood launched cryptocurrency trading in February 2018 through its subsidiary, Robinhood Crypto, LLC (RHC). As of Mar-21, the company offers seven cryptocurrencies (Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic and Litecoin) for trading. Bitcoin was the most traded cryptocurrency on the Robinhood platform by notional value for 2020 and Q1-21. In Q1-21 Dogecoin represented 34% of cryptocurrency revenue (~$30M) up from 4% in Q4-20. Currently, Robinhood does not allow customers to deposit or withdraw cryptocurrencies into or from their platform, but claim they may offer this in the future.

In the first quarter of 2021 alone, Robinhood saw over 9.5 million customers trade approximately $88 billion of cryptocurrency on its platform, and as of Q1-21 hold ~$12 billion in cryptocurrency AUC, a 23-fold increase from Q1-20.

Robinhood Gold

Robinhood Gold, launched in 2017, is a monthly paid subscription service that provides customers with premium features, such as enhanced instant access to deposits, professional research, Nasdaq Level II market data and, upon approval, access to margin investing.

Cash Management

Robinhood Cash Management, launched in 2020, and enables customers to save and spend by paying bills, writing checks, earning interest, withdrawing funds via ATMs and receiving Federal Deposit Insurance Corporation (FDIC) pass-through insurance on cash swept from users’ brokerage accounts. As Q1-21, Robinhood has more than 3.4 million debit card holders under their Cash Management product.

Learning & Education Solutions

Robinhood has a suite of products to help educate their community on investing and broader financial success and well-being. (1) Robinhood Snack or “Snacks” is a curated digest of business news and stories delivered both daily and weekly. Subscribers, of which there are 32M as of Mar-21 gain access to business news in a digestible format. (2) Robinhood Learn is a collection of articles, guides and tutorials to help make finance more accessible and understandable. Learn has had more than 7M cumulative views as of quarter end Mar-21. (3) Newsfeeds provides users (6.4M in 2020) with access to free premium news.

Source: Company S-1

Underlying all of Robinhood’s products are technology and design principles that are critical to the company’s promise of building products that customers love. Robinhood’s mobile app is the core front-end to how customers engage with the platform. Robinhood has also built: (1) self-clearing system administered through Robinhood Securities, LLC (RHS), enabling clearing and settling of trades across stocks, ETFs and options without relying on a third-party clearing firm, an approach that increases internal visibility and allows for innovation (2) order routing system, a proprietary system that uses statistical models to evaluate past order and execution quality data to automatically route customer orders to the market makers that have historically given best prices. This competition-based system should create incentive for market makers to provide better prices for customer, in order to receive more orders in the future (3) machine learning platform used across the business for things like fraud detection, customer support workflows (during Q1-21, almost 50% of all customer service cases were solved using intelligent automation), and personalized content recommendations.

Source: Company S-1

As of Mar-2021, Robinhood has 550 engineers.

Business Model Summary

Robinhood earns revenues from three defined buckets (1) Transaction based revenues (75% of 2020 Revenue) (2) Net interest revenues (19% of 2020 Revenue) (3) Other revenues (6% of 2020 Revenue).

Transaction Based Revenues

Robinhood pioneered “commission free-trading,” but Robinhood customers are not trading for free‍. Transaction-based revenues come from routing user orders for options, equities and cryptocurrencies to market makers. With respect to equities and options trading, such fees are known as payment for order flow, or PFOF. With respect to cryptocurrency trading, the company receives “transaction rebates.” In the case of equities, the fees received are typically based on the size of the publicly quoted bid-ask spread for the security being traded; that is, Robinhood receives a fixed percentage of the difference between the publicly quoted bid and ask at the time the trade is executed. For options, the fee is on a per contract basis based on the underlying security. In the case of cryptocurrencies, the rebate is a fixed percentage of the notional order value. Within each asset class, whether equities, options or cryptocurrencies, the transaction-based revenue Robinhood earns is calculated in an identical manner among all participating market makers. Equity and option orders are routed in priority to participating market makers that Robinhood believes are most likely to give customers the best execution, based on historical performance, and the company claims to not consider transaction fees when routing orders. Payments are collected monthly in arrears from each market maker.

Robinhood’s PFOF and Transaction Rebate arrangements with market makers are a matter of practice and business understanding and not documented under binding contracts. For the Mar-21 quarter, 59% of total revenues came from four market makers. The chart below illustrates the total revenue concentration by top market makers for 2019 and 2020.

Source: Company S-1

PFOF practices have drawn heightened scrutiny from the U.S. Congress, the SEC, state regulators, and other regulatory and legislative authorities. For example, in November 2018, the SEC amended its rules relating to broker-dealer disclosure of order handling and routing to require that, among other things, such public disclosures must now describe additional detail regarding terms of PFOF arrangements and profit-sharing relationships that may influence a broker-dealer’s routing decision. Additionally, Robinhood’s PFOF practices were the subject of a line of critical questioning during a February 18, 2021 U.S. Congressional hearing related to the "memestock" trading restrictions in which Co-Founder and CEO, Vladimir Tenev, provided testimony.

Net Interest Revenues

Net interest revenues come primarily from Robinhood’s securities lending program and interest earned on margin lending and cash deposits, net of borrowing costs related to the company’s revolving lines of credit.

Other Revenues

Other revenues primarily consist of Robinhood Gold, a monthly paid subscription service that provides users with premium features. Other revenues also include proxy rebate revenues and miscellaneous fees charged to users.

Revenue Type by Percentage of Total Revenue

In 2020 and continuing into Q1-21 Robinhood’s revenue mix shifted in favor of transaction-based revenue and away from net interest revenue and other revenue. In Q1-21 transaction-based revenue was 80.5% of total revenue, its highest percentage in any of the last 9 quarters.

Source: Company S-1

Percentage of Transaction Based Revenue by Asset Class

Options make a up the largest percentage of transaction-based revenue, despite being a small fraction of assets under custody (AUC). Comparing revenue as a percentage of AUC can be mis-leading given the implied leverage that come from trading options. Cryptocurrency transaction-based revenue grew from 4.4%(~$4M) in Q1-20 to 20.8% (~$88M) in Q1-21, up a staggering ~1,967% YoY.

Source: Company S-1

Assets Under Custody (AUC), ($M)

Robinhood currently has over $80 billion AUC.

Source: Company S-1

Asset Type Under Custody (% of Total Assets)

Equities make up the largest percentage of assets held by users and cryptocurrency has been growing rapidly. AUC are impacted by net deposits as well as asset appreciation.

Source: Company S-1

Robinhood does not provide data on trading volume or implied revenue as a percentage of AUC. That said, on an average implied 2020 AUC (average end of year 2019 & 2020 AUC) divided by total 2020 revenue implies 2.49% AUC fee and on 2020 transaction revenue implies a 1.87% AUC fee. Q1-21 annualized total revenue implied AUC fee equals 2.90% and on a total revenue transaction revenue basis implies 2.34%. Despite “commission-free trading” it appears Robinhood is consistently making ~2% of revenue as a percentage of AUC.

Summary User Metrics and GTM (Go-to-Market)‍

Robinhood acquires customers through paid marketing, the Robinhood Referral Program and organic word of mouth. Robinhood highlights net cumulative funded accounts as a key user metric. Net cumulative funded accounts are defined as the total net funded accounts for a stated period inclusive of churned users and resurrected users. An active funded account is a Robinhood account into which the account user makes an initial deposit or money transfer of any amount during the period whereas churned users is where an account balance dips to or below zero dollars for 45 consecutive days.

In 2020, Net Cumulative Funded Accounts grew to 12.5 million, up 145% YoY, and increased to 18.0 million as of Mar-21, up 150% YoY.

Source: Company S-1

Although net funded accounts is likely the most important user KPI, Robinhood also provides information on monthly active users (MAUs) and daily active users (DAUs).Active users include users engaging with Robinhood's mobile app, debit card and content via the web and mobile. Mar-21 MAUs were 17.7M, up 106% YoY, but the graph below highlights some of the user growth month-month volatility including a Mar-21 pull-back from a Feb-21 peak likely driven by the memestock craze.

Source: Company S-1

Under its referral program, Robinhood credits referring and referred customers with a stock reward (of one share each per referral), with the potential value of each share ranging from $2.50 to $225. Each stock reward is selected randomly from Robinhood’s previously purchased inventory of settled shares held exclusively for this program. Approximately 98% of customers receive a stock reward having a value ranging from $2.50 to $10. Referring customers can earn more than one reward through the Robinhood Referral Program by making multiple referrals, subject to a maximum of $500 in total rewards earned annually per customer. Stock rewards are also available to customers who sign up through paid marketing channels. As a result, over 80% of new Funded Accounts in 2020 and in Q1-21 joined the platform organically or through the Robinhood Referral Program.

Total Quarterly Marketing Spend ($000's)

Marketing spend experience large swings up and down by quarter with an increase of over 3x from Q4-20 to Q1-21.

Source: Company S-1

Type of Marketing Spend (as a % of total marketing spend)

Robinhood spent $102M on marketing in Q1-21, of which 57% went to the Robinhood Referral Program

Source: Company S-1

Robinhood has been able to drive down average cost to acquire a new Funded Account by more than 60% from $53 in fiscal 2019 to $20 in fiscal 2020. For Q1-20 and Q1-21, the average cost to acquire a new Funded Account declined from $32 to $15, respectively.

Declining customer acquisition cost and increasing ARPU (more on that below) have led to decreasing payback periods. For the monthly cohorts 2019, average revenue payback period was approximately 13 months, and for the monthly cohorts in 2020, average revenue payback period improved to less than 5 months.

Beyond growing new funded accounts, Robinhood also has the ability to increase average revenue per user (ARPU). The two main mechanics for ARPU growth are increasing net deposits per user (or cohort) and offering additional products (e.g. cryptocurrencies) onto the platform. These mechanics help drive increasing ARPU and compounding net deposit retention and revenue retention.

Cumulative Net Deposits by Cohort ($M)

Net deposits include all cash deposits net of reversals, cash withdrawals, and other cash or equity transferred off the Robinhood platform. From January 1, 2017 through end of year 2020, average cumulative net deposits across Robinhood's monthly cohorts increased 3.3x after 12 months of initial deposit and 4.1x after 24 months of initial deposit. This is a strong indication of customers’ trust and appetite to expand their relationship with the platform.

Source: Company S-1

Annual Average Revenue per Users (ARPU)

ARPU is heavily tied to transaction revenue so will vary quarter to quarter, but Robinhood has been driving ARPU growth in 2020, up 66% YoY, and in Q1-21 with the rise of memestocks and cryptocurrency volumes.  

Source: Company S-1

Cohort Revenue Retention ($M)

Compounding net deposit retention and higher ARPU have translated into expanding revenue retention. On average, revenues per user increased nearly three-fold in the first 24 months for both their 2017 and 2018 annual cohorts. It is also impressive to see that the expanding revenue trend continues beyond 24 months.

Source: Company S-1

Other User / Demographic / Market Stats

  • Robinhood believes that close to 50% of all new retail funded accounts opened in the U.S. from 2016-2021 were created on their platform
  • The median age of customers on the platform is 31
  • Over 50% of customers are first-time investors
  • Over half of 18-44 year-olds in the U.S. know who Robinhood is according to an internal brand survey conducted in Mar-21
  • 30% of retail investors in the U.S. place orders using a mobile app, according to 2018 FINRA surveys; that number grows to 59% when looking solely at participants aged 18-34
  • Approximately 70% of Robinhood's AUC came from customers on the platform aged 18 to 40
  • As of the end of Q1-21, Robinhood's customers have seen appreciation of their assets of approximately $25 billion
  • The number of women on Robinhood nearly tripled in 2020 and Robinhood has more than double the industry average of Black and Hispanic investors on the platform
  • Only half of US households invest in the stock market
  • According to a 2019 Pew Research survey, approximately 60% of all Americans still do not have investments outside of their retirement accounts, and, according to a 2020 Gallup poll, an even greater percentage of young adults aged 18 to 29-68% have no money invested in the stock market at all
  • According to data from Experian based on a sampling of approximately two million funded accounts in November 2020, approximately 65% of Robinhood's customers with funded accounts have credit scores of prime or higher, and over 65% have debt to income ratios under 20%
  • As of Q1-21, Robinhood owns approximately 55 issued design patents and three pending design patent applications related to the platform’s graphic user interface
  • As of Q1-21, Robinhood owns 60 issued trademarks registrations and 24 pending trademark applications

Market Opportunity

Financial services are a critical component in people’s daily lives across the world. Activities such as investing, saving and spending, micro-merchant payments, lending and insurance are core financial activities that offer avenues for Robinhood to grow with customers throughout their financial journey. Robinhood’s current focus is its retail brokerage, cryptocurrency trading and cash management offerings. U.S. retail investors are estimated by Charles Schwab to have total assets of approximately $50 trillion, implying that Robinhood still has sub 2% market share of all U.S. retail assets. Retail investing now comprises roughly 20% of U.S. equity trading volume, doubling in the decade from 2010 to 2020. As of March 31, 2021, cryptocurrency market capitalization has grown to $1.9 trillion, up from $450M when Robinhood launched cryptocurrencies in February 2018. In addition, the worldwide daily average market volume of Bitcoin was over $54 billion in March 2021, as compared to approximately $8 billion in February 2018. The future estimated size of the cryptocurrency market varies greatly and are a real unknown variable in Robinhood’s revenue opportunity. A Nilson Report estimated, U.S. prepaid and debit card purchase volume to be approximately $3.8 trillion dollars in 2020.

Today, Robinhood offers services exclusively to U.S. citizens and permanent residents with a legal address within the United States or Puerto Rico. Total global wealth outside of the U.S., as of mid-2019, has been estimated at over $250 trillion, according to the Credit Suisse Research Institute. Despite being unsuccessful in extending their product beyond the U.S. to date, it is clear the opportunity to democratize finance exists globally and Robinhood has clear ambitions to move beyond the U.S.

Competition

Robinhood competes with traditional and new financial services players that offer brokerage, cryptocurrency and banking solutions. This may include traditional banks, traditional brokerage platforms and new fintech entrants. In 2020 Robinhood acquired over half of all new app downloads among mobile investing and trading platforms in the U.S. (a group comprised of Robinhood, Etrade, Fidelity Investments, IBKR, M1 Finance, Schwab, TD, Ameritrade, Thinkorswim, Vanguard and Webull) according to mobile data and analytics provider App Annie.

COVID-19 Impact

Since the onset of the COVID-19 pandemic in March 2020, Robinhood has witnessed substantial growth in their customer base, retention, engagement and trading activity metrics, as well as continued gains and periodic all-time highs achieved by the equity markets generally. During this period, market volatility, stay-at-home orders and increased interest in investing and personal finance helped foster an environment that encouraged an unprecedented number of first-time retail investors to become Robinhood customers and begin trading on the Robinhood platform. It is unclear whether these trends and behavioral shifts will continue as reopening measures continue. Additionally, to the extent that government stimulus measures enacted in response to the pandemic have contributed to this increase in customer engagement, there could be a negative impact on future customer engagement if no additional stimulus measures are taken.

% Ownership, Pre-Offering

Robinhood lists 4 investors as >5% stakeholders including DST Global, Index, New Enterprise Associates (NEA) and Ribbit Capital. Vlad Tenev owns 8.3% and Baiju Bhatt owns 10.8%.

Preferred Stock Prices by Series & Liquidation Amount ($M)

Robinhood has raised ~$2.19 billion in redeemable preferred equity over series of rounds A-G and ~$3.55 billion in aggregate convertible notes for a total of ~$5.74 billion in total equity to-date.

Source: Company S-1

As noted above, during the memestock hype in late January and early February, Robinhood experienced trading restrictions as well as a liquidity crunch due to increased deposit requirements imposed by the NSCC. As a result, in February 2021 Robinhood issued two tranches of convertible notes, consisting of $2.53 billion aggregate principal amount of Tranche I convertible notes and $1.02 billion aggregate principal amount of Tranche II convertible notes. These notes will automatically convert into common stock at the IPO at a conversion price equal to the lower of (i) 70% of the cash price per share paid by investors in the IPO offering and (ii) $38.29 (in the case of the Tranche I convertible notes) or $42.12 (in the case of the Tranche II convertible notes). As outlined in the financial section below, the aggregate notes are using GAAP principles are accounted for using a fair market value as a warrant liability and reflect ~1.5 billon loss in Q1-21.

Acquisitions

Since 2019, Robinhood discloses completing two acquisitions of MarketSnacks (Mar-19), a curated digest of business news and stories, and Binc (Mar-21), a technology focused recruiting company. No financial terms are disclosed for either transaction. Robinhood notes that acquisitions in both the U.S. and international represent potential opportunities.

Financials and Other Metrics Output

Historical P&L ($000's)

Source: Company S-1

Quarterly Revenue & Growth Rates ($000's)

Source: Company S-1

Revenue Run-Rate & Implied Net New Revenue ($000's)

Source: Company S-1

GAAP Expenses as a Percentage of Revenue

Source: Company S-1

Quarterly P&L ($000's)

Source: S-1

Valuation

Robinhood investors will likely look to NTM (next-twelve-months) revenue multiple comparables for both traditional brokerages as well as other high-growth fintech companies. The output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value) / NTM revenue multiples from other public, high-growth fintech businesses. In the traditional broker comps, we point to Charles Schwab and Interactive Brokers and in the high growth fintech bucket we point to PaypPal, Square, Coinbase, Afterpay, Affirm, SoFi and Lemonade.

Source: Meritech Insights

As mentioned in other posts, companies do not release projections or guidance in S-1's. While it is hard for the market to estimate near-term growth rates for any business, Robinhood’s COVID-19, meme volatility (stocks and cryptocurrencies) and stimulus impact make it even more challenging. All that said, I would expect Robinhood to trade north of $30 billion, well above the last round preferred price of ~$12 billion in late 2020.

Source: Multiple ranges from Meritech Insights. Enterprise value ranges are illustrative

Conclusion

Given its innovative product and business model, continued controversy and cultural relevance, Robinhood is one of the most highly anticipated U.S. consumer IPOs in 2021. Although Robinhood’s transaction-based revenue model exposes it to revenue volatility, the overall market size and trend toward democratizing finance via access on a mobile phone feels to be a powerful long-term trend and should position Robinhood to continue to compound growth for years to come.

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Special thanks to Aimee He for the help on this post.

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