eToro's Valuation & What It Means for Robinhood

eToro's Public Debut and Implications for Robinhood

Recent news has focused on numerous events, but a significant development may have been overlooked. eToro, a consumer stock-trading platform originating in Israel, is preparing to become a publicly traded company in the United States through a Special Purpose Acquisition Company (SPAC).

The specifics of the SPAC transaction are detailed elsewhere – Mary Ann offers a comprehensive overview. For our analysis, the key point is that eToro is a direct competitor to Robinhood within the U.S. market.

However, eToro also maintains a substantial and dedicated user base in Europe. Crucially, the process of going public via a SPAC has made a wealth of the company’s financial information accessible for review.

Understanding the Significance of eToro's Financial Data

This data is particularly valuable given the current situation surrounding Robinhood. Robinhood is navigating legal challenges and considering its own initial public offering (IPO).

Therefore, eToro’s financial disclosures could offer valuable insights into the competitive landscape in which Robinhood operates. Analyzing eToro’s performance may help illuminate aspects of Robinhood’s business.

We will be examining eToro’s investor presentation. Our initial focus will be on assessing the company’s financial figures, overall health, and valuation.

Following this, we will draw comparisons between eToro’s business model and the known details of Robinhood’s operations. This comparative analysis will be key to understanding the broader market dynamics.

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Let’s begin a detailed examination of eToro’s data to gain a clearer understanding of the competitive forces at play in the zero-commission trading space.

eToro’s Public Debut and $10 Billion Valuation

The impending public listing of eToro, facilitated through a SPAC deal, represents a significant event, with a calculated value exceeding $10 billion. While market acceptance of this valuation remains uncertain, the initial public offering is noteworthy for the Israeli startup ecosystem and the potential returns for numerous venture capitalists and investment firms.

What aspects of eToro have convinced its SPAC backers of such substantial worth? A detailed examination of the investor deck, accessible here, provides insight.

To showcase both its recent expansion and the relatively lenient disclosure standards associated with SPAC presentations, eToro has included its complete financial results for 2020 alongside its January 2021 performance data. This decision reflects the company’s strong start to the year, mirroring the experiences of firms like Robinhood.

The following chart illustrates eToro’s positive trajectory in 2020 and its exceptionally strong beginning to 2021:

These figures are certainly impressive. eToro further breaks down the 2020/2021 data, revealing an average of 192,000 monthly registrations in 2019, increasing to 440,000 in 2020, and reaching 1.223 million in January 2021. The company aims to convey to investors that its past growth serves as a strong indicator of future potential.

Furthermore, the company reports a decreasing cost of acquiring users (CAC) through early 2021, with figures declining from $52 in 2019 to $41 in 2020 and $31 in January of this year.

A distinguishing characteristic of eToro is its limited reliance on payment for order flow (PFOF) as a revenue source. Instead, as detailed on the 37th slide of its presentation, 87% of its revenues are generated from “trading revenue,” specifically the spread – the difference between buying and selling prices – for stocks and crypto assets. In contrast, Robinhood recently informed Congress that PFOF constitutes the majority of its revenue.

The composition of eToro’s blended asset-based revenue – encompassing both trading income and interest – has evolved over time. In 2017, crypto assets accounted for 63% of this revenue. By 2020, commodities represented 32% and stocks 44%. The substantial crypto revenue was largely driven by the bitcoin surge of 2017 and 2018.

When discussing its historical revenue growth, eToro attempts to demonstrate that even after accounting for fluctuations in crypto income, its performance remains relatively consistent:

This chart will likely appeal to investors bullish on cryptocurrency. Those with a more cautious outlook may find the company’s increasing equity revenue more reassuring. It’s important to note that Coinbase wasn’t the only entity to benefit from the recent crypto boom, nor the only one to experience a subsequent slowdown.

Calculating the figures, eToro’s $10.4 billion valuation and $605 million in revenue translate to a multiple of approximately 17.2x its 2020 revenues. Considering the positive momentum indicated by its January 2021 growth figures, this revenue multiple could potentially decrease; however, the first quarter of 2021 is nearing completion, effectively solidifying those results.

The company’s run-rate multiple is lower than the 17.2x figure, although the precise extent of this difference is not immediately apparent.

Underpinning this multiple is a history of adjusted profitability. The following data illustrates eToro’s financial performance:

Notably, eToro managed to generate unadjusted EBITDA even during 2019, a year in which its revenues declined. This is a positive sign. While 2020 profits did not surpass those of 2018, the company’s growth was substantial enough that investors are unlikely to be concerned, given the current market climate favoring growth-oriented companies.

The company is prioritizing growth over immediate profitability. Slide 44 of the presentation reveals plans to increase marketing expenditure to $392 million in 2021, up from $229 million in 2020 – a 71% increase. While eToro anticipates users to recoup their CAC within six months, this represents a significant investment.

What returns does eToro anticipate from this $400 million marketing spend? The projected revenue growth is as follows:

The company forecasts a modest 17% growth rate in 2022, followed by approximately 30% expansion in subsequent years. Projections beyond 2020 are inherently speculative, but accepting the company’s SPAC-deal price implies an expectation of around 10x projected 2021 revenues.

This is a more reasonable valuation for a company with a history of revenue fluctuations beyond its control. The extent to which eToro can influence its revenue growth is a key consideration. The company also anticipates near break-even EBITDA in 2021, with projected growth in adjusted profitability beginning in 2022. Time will tell.

What key takeaways can we glean from this analysis? The following points are crucial:

• Revenue derived from diverse assets can be highly volatile, shifting with market trends and consumer investment preferences. This parallels observations from Coinbase’s S-1 filing, albeit in a broader context due to eToro’s wider range of asset classes.
• Significant demand and revenue exist in the commission-free trading space, suggesting that multiple winners are possible. As evidenced by eToro’s growth, particularly in the European market, regional leaders may emerge. This could limit the upside for Robinhood as it competes with both domestic rivals and expands internationally, and vice versa for eToro in Europe.
• It is possible to operate a profitable commission-free trading platform without relying on PFOF.
• Trading revenue typically does not command the same valuation multiples as software companies.

To a certain extent, trading platforms are being valued more akin to high-margin video games than traditional software businesses. This is understandable, given the inherent revenue variability associated with video games. Consequently, investors do not assign them the same multiples as software companies, particularly those operating in the SaaS model. Therefore, eToro should receive a valuation below that of a typical software company, despite its attractive growth, economics, and demonstrated operating leverage.

Based on these insights, two questions arise regarding Robinhood:

• What revenue can Robinhood generate from cryptocurrency trading? Is this revenue substantial enough to offset its reliance on PFOF? If Robinhood is more diversified than currently perceived, it could be a larger and more resilient business, justifying a higher valuation.
• Is Robinhood seeking a software multiple or a trading-shop valuation? While Robinhood offers some recurring revenue through its subscription plans, these likely represent a small fraction of its overall revenue, particularly compared to its growing PFOF income. Its valuation expectations should reflect this reality.

eToro’s documentation and valuation provide valuable insights into its market and potentially its competitors. Its early trading performance will offer further clarity. Further analysis will follow as more information becomes available.