My name is humphrey and on my channel we discuss all things: personal finance and investing and today’s video is pretty straightforward. We’Re going to discuss the biggest takeaways from robin hood’s s1 that was filed recently. The s1 document is what you file when you go public and it gives you insight into all the nitty gritty details of their business. So if you read this 200 plus page document, you will learn a ton about robin hood, but lucky for you. You don’t have to because i found the biggest takeaways from their s1 that i’m going to share with you today. First we’re going to discuss how robinhood makes their money with a full financial breakdown. Then i’ll go over some bullish and bearish arguments for robinhood we’ll also break down one of their unique features that robin hood offers compared to other brokers and, lastly, i’m, going to answer what i’m going to do on ipo day before we start only a small percentage Of my viewers are subscribed so make sure to subscribe. If you enjoy this content, it’s free – and you can always change your mind so normally when i break down these ipos for you guys, i generally give you a brief overview of what the company does, but with robinhood. I don’t think that’s going to be necessary because robinhood is a trading app and a lot of people know exactly what robinhood does and robinhood gets in a lot of regulatory trouble, that’s.
Basically the summary of robinhood all right, so let’s go over their financial breakdown together. In 2020 alone, they made 958 million dollars, which is about 3.4 times their revenue from the previous year, which is pretty crazy. More people are just inside with nothing to do during 2020. So of course, most people probably downloaded robinhood to start trading for fun. Now, on these revenues in 2020, they actually didn’t lose money, but they made a little bit of profit so about seven million dollars. So technically, as of 2020, robin hood is a profitable company, even though just by a very small margin. Now, in q1 of 2021, which was this year, they had 522 million dollars of revenue, which means that in just one quarter alone, they made more than half of the revenue from the year before. I basically attribute this to even more activity due to the gamestop amc drama early in q1 that resulted in robin hood being at the top of the app store for at least a few weeks. If robinhood continues their pace of revenue this year, that means their revenue for this year will be about 2 billion, so let’s actually break down their revenue in q1 and on twitter there’s, a great sankey chart from rex salisbury that breaks down their exact q1 revenue that I thought was a really good visual, so here we can see that for q1 2020 of their 522 million dollars in revenue, 420 million was transaction based.
So of that 420 million in transaction based revenue, 198 million came from options. 133 million came from equities and 88 million came from crypto. This is actually quite interesting to me because if we combine the 88 million dollars from crypto and the 198 million dollars from options – that’s basically 286 million dollars of transaction revenue from what i would call speculative investments. So a friend of mine actually joked with me. The other day after seeing the sankey chart that almost half or more than half of robin hood’s revenue is derived from gambling activities, which is kind of true. I guess now, one of the biggest controversial topics and actually risk factor is actually how robinhood derives their revenue. They engage in what’s called pfof or payment for order flow, and, if you don’t know what that means, basically robinhood offers free trades to investors, like you and i, but while they’re free to you and i on the front end on the back end, they’re, actually routing Your trades to different market makers, mostly hedge funds, in this way robinhood, makes fractions of a penny on your trade by allowing the hedge fund to get a first look at your order before it hits the market. The hedge fund then decides whether or not they want to take any action on your order, but the end result is that you might not get the best possible price out there for your stock trade. Now, while fractions of a penny, doesn’t sound like a lot, if they do this a million times a day, that adds up to quite a lot of revenue and that’s, actually how robinhood generates most of their revenue in terms of equities now, payment for order flow has Been controversial for quite a while, but other brokers are guilty of it too.
I mean just look at this chart right here: td, ameritrade, e trade and schwab all engage in it, and it makes up quite a bit of their revenue as well. It’S. Definitely one of the reasons why all these brokers are able to offer free commissions because, on the back end they’re making up for that cost. Now, for an infrequent trader like say, if you’re buying and holding stock with robinhood, you might not feel the effects of pfof, but if you’re a high frequency trader, you should always examine how the broker routes your order to make sure you’re getting the best possible price. All right, so that was just a quick caveat on payment for order flow in terms of robinhood’s financials. They actually seem quite strong, but there are definitely some risk factors to the revenue here which we’ll go over now in our bowl versus bare case section. So first let’s cover their bolt case in terms of a bowl case for robinhood let’s. Take a look at some of the most compelling numbers from the s1 itself, because most of these numbers just speak for themselves. According to their key numbers, they have 18 million funded accounts and 17.7 million active users, and i wanted to bring up this chart of their daily active users and monthly active users, because it is really interesting. We can see that the growth of their users really exploded in q1 of 2020, with the onset of the pandemic and then really took off in q1 of this year.
I assumed because of the gamestop and amc drama. Now i don’t think this will stay elevated like this over the long term, and i actually expect it to taper off a little bit, but just how much i’m not sure so by knowing these numbers. That means a crazy high number of people that have funded an account with robinhood actually ends up sticking around and using it monthly. A large percentage of people actually use it daily as well, and i just credit their interface and their ease of use on the app for this statistic in terms of growth, in 2020 alone, they had 12.5 million funded accounts and the year prior they had 5.1. So they’ve literally had this kind of like hockey. Stick growth that investors love to see. If we look at the average revenue per user, the average user is generating robinhood a whopping 137 dollars. That means for every new account that signs up that person is probably going to spend 137 dollars in fees and that’s per year. Folks, if we read the very small print here guys, it says figures in the table represent rpoo or average revenue per user for each year or annualized three month period presented. So if the average user sticks around for five years, that means the lifetime value of every single customer is gon na, be upwards of six hundred, a thousand or even two thousand dollars. Think about it like this, if someone who’s 18 years old right now, downloads robinhood and falls in love with the app they might be using robinhood as their main brokerage for the next 10, 20 or 30 years, that’s huge potential for every single customer that actually downloads Robinhood so i’m very bullish on this point for robinhood.
Another part of their key metrics is that 80 of new customers are actually organic or referred and that’s sign of a really really great business because it means they don’t really have to rely. So much on marketing spend to get new users. Next up is another key chart, which is this one. We can see that most of the deposits in 2020 were from the newest cohorts of users aka the people that joined in 2020., almost half of all deposits on robinhood were from the newest cohort, and i do think this was fueled by the pandemic. But who knows what this will actually look like in 2021? You can see that from the first cohort in 2017 over time they do grow their deposits as well and same for the 2018 cohort, so we’re likely to see similar behavior in all the cohorts moving forward. Another bull argument is that robinhood will continue to add new unique features to their platform to monetize even further so far, they’ve added ipo access and cryptocurrencies and it’s this type of experimentation that will help them consistently find new sources of revenue for their growing user base And increase their overall average revenue per user. My last bull point is that, even though everyone hates on robinhood online, like on reddit and elsewhere, we aren’t really seeing that reflect in their turn. Numbers being on a brokerage is a lot stickier than people think and even though people hate on robinhood, the ui ux, has won multiple awards.
It’S, like the best out there and they’re, only losing about three percent to churn in q1, 3 isn’t. Really all that bad and should reflect well for their revenues moving forward. So now let’s actually present the bear case, because there are a lot of huge risks when it comes to this ipo. The first are legal risks. If you actually look into their s1 filings, it says quote: we are involved in numerous litigation matters that are expensive and time consuming and, if resolved adversely, could harm our reputation, business, financial condition or the results of our operations. They literally have lawsuits from finra. They have a class action lawsuit from the march 2020 outages a finra, multi matter settlement, which was actually settled, and there are lawsuits over the best execution and payment for order flow matters there’s. So many lawsuits that it’s really hard to keep up with them, and that is one of the biggest risks that robin hood faces. The second big risk is actually the sec they’re looking into the payment for order flow practices and since 81 of robin hood’s, q1 revenue came from payment for order flow. A lot rides on this risk if pfof were ever regulated or even outlawed. Robinhood is pretty much doomed and may actually fail as a company, since the basis of their company is free, trades and that’s how they generate their revenue. Another big risk i see is that their revenue is actually transaction volume dependent and so far the markets have been really really good in the world.
But if the markets ever take a dip or recession hits robin hood’s transaction volume and deposits should actually take a disproportionate hit and of their revenue. Breakdown crypto actually makes up 88 million dollars of that. So 20 of robin hood’s transaction revenue would actually take a big hit if we ever went into a crypto winter or if the crypto market ever started to tank. A lot of robin hood’s risk factors come from a lot of things that are not under robinhood’s control, which is always going to be something you need to consider. Lastly, we need to consider their liquidity. One of the biggest issues robin hood actually faced this year was during the gamestop amc drama in q1, when they could not provide enough liquidity and deposits for the dtcc that actually led them to halt trading on the big meme stock tickers and was a big blow To their reputation, this created a lot of ill will and bad publicity for the firm, and it makes you question whether or not they’re solvent and when it comes to being your broker of choice for long term, investing is robinhood a good choice. Fidelity and bigger brokerages did not have this liquidity problem and partly the problem just stems from being just too new of a brokerage. Now i want to be clear, even though i do sound, really bullish in some parts of this video. I do not want to understate the big risks that are here.
These bear arguments, although they aren’t as detailed as the bull arguments, should not be taken lightly, and the reason i think the bowl section of this video was more detailed is that there are more numbers to discuss that play into the bowl case. The bear case is much more stark and cut pretty dry if payment for order flow is outlawed, robin hood is basically worthless if a bunch of market factors hit the globe, robin hood looks doomed if even revenues return to pre pandemic levels, which they actually might robin Hood won’t perform as well as they do at the onsite at their ipo, okay. So, lastly, i want to break down at least one unique feature that i think robinhood is doing well compared to other brokers, and that is the early ipo access. Robinhood is actually planning to make available 20 to 25 of their initial, offering shares to retail investors at the ipo through their own ipo access feature, which means that you can actually get access to robin hood shares on robin hood, which is pretty funny. Basically, romney’s been testing this new feature and has started to allow users to buy into ipos before they actually hit the market through allocations. Now, traditionally, this is actually reserved for really big clients at big banks, so pretend that you have a 10 million account at morgan, stanley and morgan stanley helped underwrite an ipo. Traditionally, morgan stanley would receive an allocation of ipo shares that they would then distribute to their rich clientele.
Those clients would be able to buy the ipo shares and be able to make an instant profit when the shares hit the market and since most of the shares that actually hit the market during an ipo spike up, they make a lot of money. According to this article, the average first day, trading pop on u.s listings of businesses in 2020 was 36 percent. Now, if you didn’t have 10 million dollars in this hypothetical situation, you would not be able to get an allocation of shares so being true to their motto. Robin hood wanted all retail investors to get a shot at an ipo allocation, which i think is pretty cool right now. Ipo access is only available for a certain number of users who are selected on a random basis to ensure the rollout is as fair and unbiased as possible. So while it is random at least they’re testing out the feature and rolling it out to more people, i personally was able to get access to this feature and get 11 shares of clear or ticker symbol. U, before the shares, hit the market and i’m already up. Quite a bit on them. I do like this feature and in the future i wonder if allocations will be based on a lottery system or some other type of system. I still think it’s one unique feature that none of the other brokerages are doing. Okay, so robinhood is valued around 40 billion dollars in february of 2021.
So that means if they do go public at that valuation, they would be trading at around 21x. This year’s revenue of 2 billion and 19 times profit. Now, what i’m personally going to do is i’m personally going to sit on the sidelines for the ipo during ipo day, but if the price of robin hood actually tanks after a few days or a few weeks of trading, we could see an opportunity to buy it. At a pretty cheap price, i do think there might be a chance that it tanks heavily because of the sentiment online like if reddit’s wall street bets starts to hate on robin hood. We can see an opportunity where it gets shorted heavily and we could make a contrarian play at that time. Anyways guys. Let me know what you guys think of robin hood’s s1 filing and all the numbers presented today. I hope that you enjoyed today’s video, make sure to like this video and subscribe to my channel for more future videos from me. If you like some free stocks, even from robinhood, you can use the link in my description below for that and also make sure to subscribe to my free sunday newsletter. It goes out every single sunday. Lastly, thanks to my patreon supporters, i appreciate you guys being here. If you guys want to see what i invest in that’s available in my patreon, you also get buy and sell alerts whenever i buy or sell a stock.