September 28, 2020

Building Your Inovation

Robinhood announced this morning that it has raised $200 million more at a new, higher...

Robinhood announced this morning that it has raised $200 million more at a new, higher $11.2 billion valuation. The new capital came as a surprise.

Astute observers of all things fintech will recall that Robinhood, a popular stock trading service, has raised capital multiple times this year, including an initial $280 million round at an $8.3 billion valuation, and a later $320 million addition that brought its valuation to $8.6 billion.


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Those rounds, coming in May and July, now feel very passé in the sense that they are frightfully cheap compared to the price at which Robinhood just added new funds. D1 Partners — a private capital pool founded in 2018 — led the funding.

The unicorn’s new nine-figure tranche, a Series G, values the firm at $11.2 billion. A $2.6 billion bump in about a month is an impressive result, one that points to an inescapable conclusion: Robinhood is still growing, and fast.

How fast is the question. There are three things to bring up in this regard: Trading growth at Robinhood, the company’s soaring incomes from selling order flow to other financial institutions, and, oddly enough, crypto. Let’s peek at each and come up with a good why as to the new Robinhood valuation.

After all, we’re going to see an IPO from this company before the markets get less interesting, if it’s smart.

Growth

Robinhood is currently walking a line between enthusiasm that its trading volume is growing and conservatism, arguing that its userbase is not majority-comprised of day traders. The company is stuck between the need for huge revenue growth and keeping pedestrian users from tanking their net worth with unwise options bets.

It’s worth noting that Robinhood spent a lot of its funding round announcement email to TechCrunch talking about its users safety and education work. It makes sense given that we know that the company is seeing record trades, and record incomes from options themselves. After a Robinhood user killed themself after misunderstanding an options trade on the platform, Robinhood pledged to do better. We’re keeping tabs on how well it manages to meet the mark of its promise.

But back to the revenue game, let’s talk volume. On the trading front Robinhood has lots of darts. And by darts we mean daily average revenue trades. Robinhood had 4.31 million DARTs in June, with the company adding that “DARTs in Q2 more than doubled compared to Q1” in an email.

The huge gain in trading volume does not mean that most Robinhood users are day trading, but it does imply that some are given the huge implied trading volume results that the DARTs figure points to. Robinhood saw around 129,300,000 trades in June, which is 30 days. That’s a lot!

And the company is making soaring money off that volume. As The Exchange wrote just the other week about Robinhood’s Q2 payment for order flow:

According to The Block’s own calculations, Robinhood saw saw its total payment for order flow revenue roughly double, rising from $90.9 million in Q1 2020 to $183.3 million in Q2 2020, a 102% increase. [ … ] A $183.3 million quarterly run-rate for payment for order flow puts Robinhood on a $733.20 million yearly run-rate from the single product — user trade routing — alone. The company also generates income from a subscription service, among other techniques. But the growth alone from its order flow payment business makes the unicorn’s valuation multiple increasingly attractive.

That’s impressive growth from a big revenue base.

Robinhood is likely so attractive to private investors because it has tapped a geyser of trading.

  • DARTs: Up more than 100% in Q2 compared to Q1.
  • Payment for order flow: Up more than 100% in Q2 compared to Q1.

Are we shocked that here in Q3 2020 the company is stacking up a war chest? It makes pretty damn good sense, and its revenue gains undergird its valuation. Robinhood probably has decent margins on its core service, though not SaaS-like if we had to guess, so it does deserve a high-ish multiple. Toss in huge growth and the company can command an even higher result.

And that is before we get to crypto. Robinhood added crypto trading back in early 2018, to somewhat grand note at the time. That was back when crypto was mainstream in a way that Robinhood is now, ironically.

We bring all that up as suddenly crypto trading looks lucrative. Here’s Square from its most recent earnings report:

Cash App generated $875 million of bitcoin revenue and $17 million of bitcoin gross profit during the second quarter of 2020, up 600% and 711% year over year, respectively. Bitcoin revenue and gross profit benefited from an increase in bitcoin actives and growth in customer demand.

Now, a caveat. Bitcoin revenue at Square is essentially gross sales of bitcoin with a tiny margin, but the gains detail the demand change that the payments giant has seen in terms of demand. Or more simply, Robinhood’s huge crypto revenue growth is not really revenue growth, but expansion in the gross payment volume for bitcoin that it processed.

Still, if Robinhood is enjoying similar boosts to its crypto trading, it could see rapidly rising crypto trading revenues. Add those to its rising DARTs and other revenue that we can more easily understand, and the company’s growth profile is impressive.

How long it can keep up this sort of growth if the public markets ever get dull is a different question. But at today’s numbers and today’s market, the valuation is probably in line with a norm or two. And that makes Robinhood an even more fun IPO candidate. Who doesn’t want to see these numbers?

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