Earlier this month, Robinhood (NASDAQ:HOOD) expanded its list of available cryptocurrency assets to users with the addition of Compound (COMP-USD), Polygon (MATIC-USD), Solana (SOL-USD) and the Shiba Inu (SHIB-USD) coin. Together with other top-traded cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD), the newest additions brings Robinhood’s total cryptocurrency offering count to 11.
Although the number is much more modest compared to some of Robinhood’s top crypto competitors like Coinbase (COIN) (3,000+ crypto assets offered) or Binance (BNB-USD) (600+ crypto assets offered), the company’s platform might be one of the safest and most regulatory-compliant for the nascent asset class at the moment. To date, revenues generated from Robinhood’s cryptocurrencies business has grown from 4% to more than 30% of total transaction-based revenues (or more than a fifth of total net revenues), underscoring increasing demand from the burgeoning crypto market. Yet, despite recognizing growing opportunities within the segment and increasing competition from rival crypto exchanges, Robinhood has remained prudent with the expansion of its crypto offerings. The company continues to stand by its unwavering commitment to creating a “safe and educational crypto platform”, which includes development of a “rigorous framework” for evaluating crypto asset inclusion and ensuring compliance with regulatory requirements.
In addition to the gradual introduction of additional cryptocurrency asset offerings and features to its platform, Robinhood has also entered into an agreement to acquire U.K.-based crypto platform Ziglu. The transaction, which earmarks Robinhood’s first endeavour overseas, resonates with management’s announcement during the fourth quarter earnings call earlier this year that the U.K. is currently the only “international jurisdiction that [Robinhood has] a brokerage license for.”
Although the Robinhood stock might not be the most attractive at the moment, having lost more than 85% of its value since peaking shortly after its IPO last summer, the company’s gradual, yet equitable, expansion of one of its largest and fastest-growing segments underpins significant opportunities over the longer-term. The impact of Robinhood’s latest developments in broadening its crypto offerings and presence overseas will likely become more prominent in the latter half of the year, and help offset some of the broader market volatility and related fundamental impacts ahead as the Fed prepare for one of its most aggressive policy tightening cycles to quell 40-year high inflation.
Considering Robinhood is still at very early innings of decentralizing cross-asset investing for retail investors, the stock’s current price levels could make a fair and reasonable entry point. Anticipated upside potential will be buoyed by continued execution of Robinhood’s growth roadmap to support sustained fundamental expansion, in addition to future multiple expansion and stabilization across the fintech peer group once mounting macroeconomic headwinds subside.
The Addition of COMP, MATIC, SOL and SHIB to the Robinhood Crypto Asset Roster
Robinhood announced through its company blog on April 12th the addition of COMP, MATIC, SOL and SHIB to its still-expanding list of crypto asset offerings. The development complements the company’s recent extension of its “public beta crypto wallet” to more than two million eligible users, and is consistent with management’s intension to “add more coins going forward” after having developed a rigorous compliance framework through proactive engagement with regulators.
- SHIB: The Shiba Inu coin is currently one of the most well-received cryptocurrencies, and was created as “an alternative to Dogecoin (DOGE)” after the latter drew blockbuster demand. Shiba Inu is currently “Ethereum-based”, which means the coin’s transaction trail is hosted by the Ethereum blockchain. Robinhood’s inclusion of Shiba Inu on its crypto platform comes at an opportune time, as the coin readies for the roll-out of its own “Shibarium Layer-2” blockchain. The L2 Shibarium chain is expected to help “process new transactions faster while reducing the load on the L1 main chain”, which in Shiba Inu’s case is the Ethereum blockchain, and enabling lower transaction fees. With Shibarium expected to materialize as early as the coming summer, the coin could be looking at a boost to demand and subsequently drive further growth for Robinhood’s cryptocurrencies segment. The coin’s latest roll-out of a “burning mechanism” to permanently remove some of the volume in circulation by “sending them to a wallet from which they can never be retrieved” is also likely to boost its price performance and demand as supply dwindles, drawing greater activity to Robinhood’s crypto platform over the longer-term for related trading.
- SOL: Solana is currently one of the hottest cryptocurrencies (top 10 by trading volume), with its demand partly fuelled by the non-fungible token (“NFT”) frenzy. Many prominent NFT marketplaces, including OpenSea, are integrated with Solana due to its facilitation of “smart contracts”, which are critical to earmarking NFT ownership for users. The addition of Solana bolsters Robinhood’s trajectory to becoming a go-to crypto platform considering the critical role that the coin plays in web 3, especially as the company continues to add features such as the withdrawal and deposit of crypto assets on the platform. Launched in 2020, Solana “was designed to solve the high costs and slow transaction speeds that limit the scalability of other blockchains, such as Ethereum and Bitcoin”. The coin can “process up to 65,000 transactions per second with low fees”, enabled by a “decentralized Proof-of-Stake blockchain”, which requires less computing power and energy. In simple terms, crypto transactions are materialized by using computing power to “solve complex puzzles”. Once solved, a “block”, or transaction trail, is added to the blockchain. But the larger the blockchain becomes (i.e. the more transactions hosted), the longer and more power it takes to complete a transaction, which draws many to question the adverse environmental impact of crypto investing. But through Proof-of-Stake, Solana “removes puzzles from the equation”, thus requiring less power, time, and cost to facilitate a crypto transaction while reducing “environmental degradation”.
- COMP: Unlike cryptocurrencies like Solana and Shiba Inu as discussed above, Compound is defined as an “algorithmic, autonomous interest rate protocol”. It is essentially a decentralized platform hosted on a blockchain where “users can earn interest by depositing crypto into lending pools that can be accessed by borrowers”. Think of Compound as a decentralized financial institution – through Compound, the cost at which borrowers pay and lenders receive for a specific crypto asset depends purely on supply and demand without human / systemic intervention, hence its definition as an “algorithmic interest rate protocol”. The cost and earnings related to borrowing or lending crypto assets on Compound are paid in COMP, which is the decentralized platform’s “governance token” based on the Ethereum blockchain. There is a maximum supply of 10 million COMP tokens, which can be earned through lending/borrowing crypto assets on Compound. And COMP is now tradable through Robinhood’s crypto service platform. The value of COMP is determined by supply and demand as noted earlier.
- MATIC: Polygon is a “decentralized Proof-of-Stake blockchain, which operates as a sidechain to Ethereum”. Akin to COMP in the Compound protocol, MATIC is the token of Polygon and is used for facilitating “fees, staking and governance” on the network, and is limited to a maximum supply of 10 billion units. And similar to the L2 chain discussed earlier in the Shiba Inu section, a “sidechain” is also a form of secondary blockchain built on top of a main chain, which in Polygon’s case is the Ethereum blockchain. The Polygon sidechain allows for improved transaction security and privacy, and is capable of processing “up to 65,000 transactions per second with network fees of a fraction of a cent”. According to Robinhood’s blogpost on the latest coin addition, “MATIC purchased on or sent to Robinhood may be held partially on either the Ethereum or Polygon network”.
The company is also working on the upcoming integration of Bitcoin’s “Lightning Network” to its crypto platform. Similar to Polygon and Compound, Lightning is a decentralized network that uses a “smart contract functionality in the blockchain to enable instant payments across a network of participants” using Bitcoin. Instead of facilitating transactions on the Bitcoin blockchain, the Lightning Network facilitates Bitcoin transactions on an “off-blockchain”. Lightning is capable of processing “millions to billions of transactions per second across the network” at ultra-fast speeds. Transactions facilitated by the Lightning Network are secured by “blockchain smart-contracts without an on-blockchain transaction for individual payments”, which is what ultimately enables the lightning-fast transaction speeds and low transaction fees.
Although crypto performance has taken a beating across the board in recent months due to a panoply of macroeconomic challenges that have continued to brew a risk-off environment and weigh on risky assets like crypto, Robinhood’s continued expansion of its offerings within the segment is still not too late. In the U.S. alone, about a third of Americans between 18 to 29 years old have either “invested in, traded or used a cryptocurrency such as Bitcoin or Ether”. Meanwhile, 13% of the country’s total population have “bought or traded cryptocurrency” over the past year, and represents “more than 50% of total [crypto asset] trading volume worldwide”, underscoring the growth opportunity that exists still for Robinhood’s fast-expanding crypto business within its core American market.
And as the broader crypto market continues on a consolidation trend enabled by “top-tier crypto exchanges” like Coinbase and Binance, Robinhood’s gradual expansion within the crypto scene, while leveraging its strong retail base, shows promising prospects of creating a strong showing and becoming a competitive contender over the longer-term. With safety and stability at the core of Robinhood’s crypto operations, the company addresses two of the key traits that investors are looking for in coin storage and trading platforms, which many within the peer group have continued to struggle with. This is further corroborated by recent research, which shows that top tier crypto exchanges that have been able to increase their market share in recent months, despite an overall risk-off environment, are those that have continued to “maintain security and stability”, underscoring Robinhood’s prospects ahead as the “go-to service for crypto investors”.
Other Crypto Developments at Robinhood
In addition to broadening crypto asset offerings, Robinhood has also amped up its crypto platform features to ensure streamlined user experience and compliance with its three core business goals – “1) be the best place to start investing, 2) help first time investors grow into long-term investors, and 3) continue to serve advanced investors with power and simplicity they need”. This includes the latest addition of “Intelligent Crypto Price Alerts” on the Robinhood platform, as well as bolstering the company’s “capacity and liquidity for crypto volumes” by adding another venue for crypto trading.
Outside of the U.S., Robinhood is also preparing for its upcoming penetration into new opportunities overseas, starting with the U.K. Building on the easter egg from management during the fourth quarter earnings call this year, which confirmed that the U.K. is currently the only international jurisdiction in which it has received a brokerage license for to date, Robinhood has recently announced it has entered into an agreement to acquire Ziglu, a U.K.-based crypto trading platform. Not only does the transaction add to Robinhood’s continued development of its crypto offerings, it also represents a significant milestone to the company’s grand mission to democratize finance for the world.
Ziglu currently facilitates the buy and sell of 11 cryptocurrencies, Bitcoin, Ethereum, Litecoin (LTC-USD) and Tezos (XTZ-USD). The platform also allows users to “earn yield via Boost products”, which is like term deposit or savings account where users can “invest in Bitcoin [or a Sterling stablecoin] and earn a generous 5% interest rate on top”. Essentially, when users add funds to their Bitcoin or Sterling Boost accounts, they are buying Bitcoin or a sterling stablecoin called TrueGBP (TGBP) that Ziglu then borrows and lends to other institutional investors, earning a return that is passed back to the user at an annual rate of 5%. And similar to virtual banks, Ziglu also allows users to “pay using a debit card, and move and spend money, even abroad, without fees”.
The technology acquired from Ziglu is expected to expedite Robinhood’s expansion plans throughout Europe, which currently facilitates the second largest crypto asset trading volume in the world. Specifically, Robinhood intends to leverage Ziglu for “[bringing] better access to crypto” to customers worldwide over the longer-term once the acquired technology is fully integrated into Robinhood’s eventual global app.
Crypto and Other New Offerings’ Contribution to Robinhood’s Fundamental Prospects
Citing “slower trading levels” observed earlier in the year as well as a tough prior year compare, Robinhood has guided first quarter revenues of $340 million (-35% y/y). Although management has baked into the guidance some level of optimism on improved trading levels as the quarter pans out, the increasing threat of an impending economic downturn due to protracted COVID disruptions to global supply chains, as well as an increasingly hawkish Fed on tightening monetary policy and the latest outbreak of the Russia-Ukraine war have whipsawed almost all asset classes and dampened market activity this year.
However, the company’s latest crypto developments as discussed in the foregoing analysis, alongside the recent roll-out of other platform features such as Automated Customer Account Transfer Service (ACATS-In) to enable faster movement of assets from other accounts into Robinhood and “hyper-extended hours” to increase the window of available trading time from 7AM EST to 8PM EST, are expected to improve transaction growth across the investment app. The new features are poised to help expand Robinhood’s overall addressable market, and provide partial compensation against impacts from near-term macroeconomic headwinds. As such, we remain optimistic that Robinhood will be able to meet its first quarter revenue guidance.
Looking ahead to the rest of the year, Robinhood’s cryptocurrencies business segment is expected to buoy some of the sequential growth of total transaction-based revenues as the new offerings and features continue to ramp. Dampening equity trading revenue is also expected to show some improvement later in the year as the extended trading window is expected to draw greater usage on the platform. Net interest revenues are also expected to get a late-year boost with the ramp up of new fully paid securities lending program. Similar to Ziglu’s “Boost” feature explained in earlier sections, Robinhood’s upcoming release of the fully paid securities lending program will allow users to “loan out their stocks to other financial institutions…[and] earn passive income”, while being able to engage in buying and selling as usual, even if the “stocks are on loan”. The offering is expected to garner greater user demand growth to the investment platform, as it offers a passive income that most traditional trading or direct investment platforms provided by banks do not offer.
HOOD Stock Valuation Analysis
As mentioned in earlier sections, more than 85% of Robinhood’s market value has evaporated since its IPO last summer, in part due to its slowing user growth as well as an adverse market environment for retail investing. At the stock’s current share price of $10 apiece (April 26th), we believe there are still modest additional upsides, even in the near-term once the market storm subsides with greater clarification on central bank policies, the global economic outlook, and a potential resolution to impacts from intensifying geopolitical tensions.
We have set a 12-month target price range of $10 to $12, which represents upside potential of up to 20% based on the stock’s current share price. The price target range considers compressed valuation multiples observed across the fintech and financials peer group, as well as expectations for softening near-term fundamental growth at Robinhood due to near-term macro headwinds that are discouraging retail investing.
Specifically, we have applied a different price/sales multiple to forecasted revenues for each of 2022 to 2025:
The 2021 and 2022 P/S multiples applied are consistent with the stock’s current price levels as well as actual and consensus sales growth forecasts for the relevant years. Meanwhile, for the 4.7x P/S multiple is determined by applying our sales growth forecast of 35% for 2023 to the current peer group’s sales growth to valuation correlation:
For 2024 and 2025, the further discount P/S multiples applied are consistent with the peer group’s average valuation observed, to reflect the conservative case of maturing and stabilizing growth by mid-decade for Robinhood.
Taking the average of the projected price range, we get about $11, which approximates the stock’s current share price of about $10, indicating that the market is already pricing Robinhood as if it is a maturing business instead of a fintech upstart with massive growth potential ahead still. On this consideration, we believe the stock’s current price makes an attractive entry point, as upside potential are largely secured by a reasonable likelihood of further fundamental growth over the longer-term even if valuation multiples across the peer group do not re-rate higher down the road. But considering the wide range of macroeconomic headwinds that remain unresolved still, the stock could see further volatility in the near-term, especially as investors wait for Robinhood’s upcoming earnings results later this week, as well as the Fed’s decision on the next interest rate increase coming May.
The overall sentiment on the Robinhood stock now lies almost entirely on its fundamental growth performance in the near-term, as its valuation remains compressed at levels that reflect a maturing business and underperform key benchmarks like the tech-heavy Nasdaq 100 (average P/S multiple 4.77x) amid a broad-based equity selloff that is hitting high-growth tech stocks the hardest. But the company’s aggressive goals to expand its crypto offerings in addition to usual securities to retail investors, paired with its overseas expansion efforts underscore a massive horizon for fundamental growth over the longer-term still. Even if a valuation re-rate for Robinhood and the broader fintech and financials peer group does not happen in the near-term, fundamental improvements ahead, which are reasonable considering the business’ growth roadmap, will still spell greater upside for the stock in coming years.