Robinhood's Growth: How the App Became So Popular

Robinhood's Public Filing: A Detailed Examination

Today, Robinhood officially submitted its filing for an initial public offering (IPO). A preliminary analysis from TechCrunch is available here. Following an initial review, a more comprehensive investigation into the company’s filing is now underway.

The Anticipation Surrounding the IPO

The Robinhood IPO has been widely expected, driven by the substantial capital investment awaiting realization and the company’s role as a symbol of the investing surge experienced in 2020. The COVID-19 pandemic significantly contributed to this increased interest in savings and investment.

Cultural Impact and Scrutiny

The trading platform’s services gained considerable prominence and became deeply integrated into public discourse, largely due to events surrounding the “stonks” phenomenon and the GameStop situation. Consequently, Robinhood’s public debut holds greater significance than that of a typical venture-backed company.

The company has attracted a diverse range of opinions, from enthusiastic supporters to vocal critics, and has also drawn attention from members of Congress.

Analyzing Robinhood’s Financial Performance

Despite external factors, this analysis focuses on the company’s core business operations and financial performance. Understanding Robinhood’s revenue streams and its actual profitability is the primary goal.

Article Structure

This examination will begin with a detailed assessment of growth and profitability metrics. It will then shift to an exploration of the company’s revenue composition.

Key risk factors will be discussed, and the analysis will conclude with a review of Robinhood’s decision to allocate shares to its user base.

Key Areas of Focus

• In-depth analysis of growth and profitability.
• Detailed breakdown of the company’s revenue sources.
• Examination of potential risk factors.
• Review of the user share allocation program.

A Deep Dive into Robinhood’s Expansion

Prior to examining the strategies behind Robinhood’s growth, it’s crucial to understand the scale the company has achieved.

The fintech company experienced a revenue increase from $277.5 million in 2019 to $958.8 million in 2020, representing approximately 245% growth. Further expansion occurred in the first quarter of 2021, with revenue climbing from $127.6 million to $522.2 million year-over-year, a gain of roughly 309%.

These growth rates are rarely observed in companies preparing for an IPO; a 300% increase is typically associated with pre-Series A funding stages.

Considering the company’s increasing prominence, as reflected in its financial results – directly linked to user engagement, which will be discussed shortly – it’s clear that Robinhood’s IPO will attract significant attention. The company’s public offering is a direct consequence of rapidly increasing consumer usage, which has dramatically increased its size over the past year.

Let's now focus on the topic of profitability. The following income statement provides a necessary overview for discussing Robinhood’s financial performance:

In 2019, Robinhood reported substantial net losses, totaling $106.6 million, including tax expenses. However, the subsequent year’s growth reversed this trend, allowing the company to achieve a slight profit – representing a net income of $7.4 million, expressed as a percentage of revenue.

The 2019 net loss wasn’t consistent across all quarters; losses increased from approximately $12 million in both Q1 and Q2 2019 to $38.4 million and $44.6 million in Q3 and Q4 of the same year, respectively.

This unprofitability persisted into the first quarter of 2020, resulting in a net loss of $52.5 million for Robinhood. The company then recovered, posting a net income of $57.6 million in the second quarter. The remaining two quarters of the year yielded modest profits, resulting in a small overall net income for the year.

The beginning of 2021 presented a different scenario. Revenue increased significantly from $317.5 million in Q4 2020 to $522.2 million in a single quarter, causing Robinhood to shift from a net income of $13 million in the final quarter of 2020 to a substantial loss of $1.44 billion. This figure was primarily influenced by fluctuations in the value of “convertible notes and warrant liability,” requiring further explanation.

The company clarified this as follows: “The change in fair value of convertible notes and warrant liability was due to the mark-to-market adjustment of the convertible notes issued and warrant granted in February 2021,” a period during which the company secured debt financing, likely necessitating an adjustment to the value of a significant number of underlying shares. Consequently, a large non-cash loss was recorded for the period.

Two additional points regarding the company’s financial standing are worth noting. First, consider adjusted profits. While the first quarter of this year appears unfavorable for Robinhood under GAAP accounting principles, utilizing a more startup-focused profitability metric presents a more favorable outlook. In terms of adjusted EBITDA, Robinhood’s 2020 profits rise to $154.6 million, and the first quarter of this year showed $114.8 million in non-GAAP profits. This represents perhaps the largest discrepancy between GAAP and adjusted profitability ever observed.

Understanding Robinhood's Revenue Streams

Robinhood derives its revenue from three primary sources: transaction revenues, interest income, and other income.

Transaction revenues, according to Robinhood, are generated through the routing of customer orders for options, stocks, and cryptocurrencies to market makers.

For stock trades, the company primarily benefits from Payment for Order Flow (PFOF). Additionally, Robinhood receives “transaction rebates” specifically from its cryptocurrency trading activities.

Delving into Interest Income

Interest income is straightforward, stemming from sources like securities lending transactions.

It also includes interest earned on user margin loans, cash balances, and deposits held with clearing organizations.

It’s important to note that Robinhood itself incurs interest expenses through its credit facilities.

The 'Other' Revenue Category

The “Other” revenue category encompasses various smaller income streams.

A significant component of this is Robinhood Gold, the company’s premium subscription service.

Detailed revenue figures for each category can be found in the company’s income statement.

Let's examine transaction revenues in greater detail:

During the first quarter of 2021, options trading remained Robinhood’s largest contributor to transaction revenue, although equity trading saw increased contributions.

This surge in equity revenue is likely attributable to events like the GameStop trading frenzy, which drove record results for the company.

The Rise of Cryptocurrency Revenue

A key growth area for Robinhood has been its cryptocurrency business, which has grown substantially over the past year.

Robinhood attributes this growth, in part, to the popularity of Dogecoin, as highlighted in its risk factors.

Reliance on Citadel Securities

Robinhood maintains a strong relationship with Citadel Securities, which accounted for 34% of its total revenue in 2020, an increase from 29% in 2019.

Revenues from its top four market-making partners represented 75% of total revenue in 2020, up from 62% in 2019, demonstrating a significant concentration of revenue.

A Look at Robinhood's IPO Share Allocation

Let's consider Robinhood’s choice to offer a portion of its initial public offering (IPO) shares directly to its user base. The company’s S-1 filing provides the following statement regarding this decision (emphasis retained from the original):

Two Perspectives on the Allocation

This strategy can be interpreted in a couple of different ways. It’s possible Robinhood anticipates its users will demonstrate a greater tendency to hold the shares long-term, potentially stabilizing initial trading activity.

Alternatively, the company might be aiming to distribute shares among a group of investors who may be less experienced with IPOs. The validity of either interpretation largely depends on one’s overall assessment of the company.

Robinhood: A Unique Entity

In terms of its rapid growth, customer reach, revenue generation, and financial losses, Robinhood presents a truly unique case. It’s a complex situation with many facets.

Further details will become available with the release of updated filings. We will provide more information as it emerges.