Robinhood Tumbles As Growth Slows; Crypto Revenues Surpass Stocks And Options Combined; Warns Q3 Will Be Ugly
We already knew that Robinhood’s Payment for Orderflow – the company’s bread and butter and the bulk of its revenues courtesy of its main client Citadel – would be hit big in Q2 sequentially, because having spread the company’s 606 filings two weeks ago, we showed a 34% drop in PFOF in Q2 compared to Q1, and an only modest increase Y/Y thanks to a 48% increase in option trading as revenue from orderflow from S&P and non S&P500 stocks was down 25% Y/Y,
What we didn’t know is how the rest of the company performed in the quarter. So moments ago the company reported its full Q2 earnings there were quite a few surprises, but let’s start with the key data:
Q2 Total Rev. $565M, Est. $559.5M; The company was quick to note that options revenue increased 48% to $165 million in the second quarter of 2021, compared with $111 million in the second quarter of 2020, but not so quick to point out that equities transaction-based revenue actually decreased 26% to $52 million in Q2 compared with $71 million in Q2 2020 as we observed previously.
Q2 Adj Ebitda $90 million, compared with $63 million in the second quarter of 2020
Q2 Transaction-Based Revenue $451M
Q2 Loss $502M, vs the reported preliminary loss of $487M to $537M
Q2 Net Cumulative Funded Accounts up 130% to 22.5 million vs with 9.8 million Y/Y
Monthly Active Users (MAU) up 109% to 21.3 million vs 10.2 million Y/Y
And while Assets Under Custody (AUC) up 205% to $102 billion in Q2, vs $33 billion Y/Y, the company’s ARPU was actually down to $112 in the second quarter of 2021, compared with $115 in the second quarter of 2020.
Here Bloomberg spotted an interesting nugget on slide 21 of the earnings presentation: Robinhood users are doing more with margin: Cash held by users swelled 41% to $9.9 billion in the second quarter compared with the same period a year ago. But over that same time frame, customers margin balances jumped a whopping 292% to $5.5 billion. That means net cash held by users actually fell to $4.4 billion in the second quarter.
So ARPU surprise aside, the good news is that total revenue more than doubling from $244 million a year ago and with both users and AUM clearly growing. But a question arises: this was not due to PFOF as we already observed, so where did the bulk of revenues come from? The answer: crypto.
As HOOD notes, revenue from cryptocurrencies increased to $233 million in the second quarter of 2021, compared to $5 million in the second quarter of 2020. And, as we already know thanks to the S1, the bulk of this revenue was from the Elon Musk-driven frenzy in Dogecoin.
And here is something even more stunning: Robinhood made more money from crypto trading in the Q2 ($233MM) than it did from options trading and equities trading combined ($451MM)!
And another way to see the collapse in equity revenue, the stagnant option revenue and the surge in cryptos.
In other words, with equity-linked revenues collapsing as Citadel has found other, more efficient ways to frontrun the retail public (which has shifted almost entirely to options anyway), Robinhood is now a pure play on continued option frenzy and, of course, Dogecoin.
Which is a problem as the company itself reveals, warning in its press release that “for the three months ended September 30, 2021, we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter.”
There was more bad news on the expenses outlook, where the company is warning that it will continue to invest in key areas, including regulatory and compliance functions. It’s also planning to record a one-time $1 billion charge tied to its stock-based compensation plan. Over the next 2.6 years, it will also have to recognize another $2.2 billion in unamortized stock-based compensation, Robinhood says. In other words, the company will be bleeding cash for years.
And speaking of operating expenses, these soared in Q2 to $501 million, compared to just $186 million a year ago. We’ll hopefully get a bit more color about that on the call – but one thing the company is touting in the press release is that it continued to expand its live phone support team. Why this would cost over $300 million is unclear, however.
Going back to the revenue warning, it was unclear just what is so seasonal about Q3 that trading activity slows down, but the message is clear – the company’s core business has peaked and the only growth from this point on is in crypto. The only problem is that the bulk of HOOD’s Q2 revenue came from DOGE as a result of a relentless Elon Musk marketing campaign. That’s over, as is the surge in Doge, as is the general retail euphoria in crypto.
Indeed, aside from crypto, the company’s core operations are anything but “growth”, as Bloomberg Intel’s Julie Chariell said: “The initial numbers for 2Q look pretty much in-line with what the company had guided to. The outlook, a little less clear on exactly what to expect, aside from the fact that we know that trading volumes are slowing, particularly in equities.”
Which begs the question: with equity revenues already slowing, with option revenues plateauing, why would anyone hold HOOD for its “crypto” exposure (granted Robinhood says that 60% of its “net cumulative funded accounts” traded in crypto during the quarter, but what happens when there is a sharp drop in cryptos and retail euphoria fizzles) when one can get exposure to a much stronger crypto company in Coinbase?
That appears to be the question investors are asking after hours when where the stock of HOOD is sliding rapidly, and after hitting a high of $52 earlier in the session, has tumbled as low as $45.69.
And here is Robinhood’s investor presentation for Q2.
Wed, 08/18/2021 – 16:37