$HOOD
This is going to be a super long and nerdy Robinhood post...like really long and nerdy Robinhood post...but if I'm right on the numbers then I'm basically giving you their entire Q3 earnings 28 days before they report:
Alright....let's dive in....
So, we have 2 months of data due to how Robinhood reports: July & August. This data makes it very easy to determine what revenues will look like for those two months. I'll explain my methods for how later in the post, but we only need to predict September's activity to collect the last bit of data necessary to come up with Q3 numbers.
Analysts at big Wall Street firms basically do this all day.
What have $HOOD analysts been doing over the past week?
Citi Upgrade to $23
Piper Sandler Upgrade to $27
Deutsche Bank Upgrade to $27
So, I actually think my analysis below is on par with what the analysts are seeing because all of these upgrades coming within the past week probably means they think Q3 is going to be strong after crunching the numbers.
Robinhood makes money in 2 ways: Transaction Revenues and Net Interest Income.
Now, for my analysis, I wanted to be VERY conservative. September we hit all time highs in the market. Rates came down by 50bps. But, I assumed a 20% decline in EVERY metric for transaction revenues just to assume that the platform saw zero increase month over month from August. I also saw historically that September is 20% down in previous years. Now, September for the past few years has been a bad month in the market (this September has been green) which is likely why we saw that decline in Robinhood's previous earnings, but I'm still assuming the 20% decline.
Options (Millions of contracts traded) -
July - 160M
Aug - 146M
Sep - 117M (20% lower than August)
Revenue = $197M
The $197M is based on calculating the historical amount of revenue $HOOD makes from an options contract, which is on average about 46cents per contract as a take rate. I did the same method for crypto and equities trading.
Equities
July - $104.4B
Aug - $96.2B
Sep - $76B (20% lower than August)
Revenue = $45M
Crypto
July - $5.3B
Aug - $5.4B
Sep - $4B (20% lower than August)
Revenue = 58M
I'm assuming they'll do the same $20M they did last Q in withdrawals revenue, which put transactions revenue at $327M.
NET-INTEREST INCOME:
So this one is a bit tricky with the rate cuts but I believe I am being conservative enough to account for that and still generate a predictable assumption around what their quarter will look like.
First, here are the types of NII Robinhood can make money on:
Cash Sweep, Margin Loans, Stock Lending, Credit Card, Interest from Cash.
Cash Sweep:
July - $21.8B
Aug - $22.8B
Sep - $22.8B (I'm assuming ZERO growth in September on this)
Revenue = $49M (this is calculated as a proportion of what they have historically made as a spread for cash sweep and is not subject to rates coming down since they have a fixed spread)
Margin
July - $5.4B
Aug - $5.5B
Sep - $5.5B (assuming ZERO growth in September)
Average Margin Balance = 5.5 with 6% take rate.
Now, I think the take rate will likely be 6.5% because it was closer to that during the last quarter but I'm account for the 50bps decrease that went into effect towards the end of September from 6.75% to 6.25% on margin and accounting for the fact that April and May had higher rates since they really decreased their margin rates to 6.75% during the end of May and only had 6.25% for the month of June. I think it'll be slightly higher than 6%, but again I'm being conservative here.
Revenue = $82.5M
Robinhood did $34M in securities lending revenue in Q2. If you assume no growth from August to September in this category, you get to $30M in securities lending revenue.
Robinhood did $6M in credit card revenue in Q2. I'm assuming no growth again and will go for $6M in credit card revenue for Q3.
Now the final two categories in net interest income are:
Interest on segregated cash, securities, and deposits and Interest on corporate cash and investments.
This is the hardest to predict for two reasons: 1.) Rates came down in September so I'd imagine whatever rate Robinhood was getting on their cash came down near the end of September as well and 2) We don't know how many shares Robinhood bought back. They authorized $1B in buybacks, but if they spent $200M, that's $200M that wasn't collecting interest income for a few months.
To simplify it, I'm taking off about 5% on the first category and 10% on the second category for Q3. The logic here is that I've been very conservative in every other category which gives me enough room to be slightly wrong here and make up the difference elsewhere and that even if rates were down starting Sep 18th, that shouldn't massively effect the interest they got on their cash. The one thing I can't predict is how much money they took off their balance sheet to buy back their stock, but if they really used a ton of it, then that's going to be great for EPS so the hit on revenues for net interest income won't be that bad.
This comes out to $65 and $60M.
Okay, so when you add everything up, you get...
$648M, which when compared to last year's earnings of $467M...is 39% growth. The past 2 quarters have been 40% growth.
This is all based on assuming equities/crypto/options all fall 20% in volumes for September, no increase in margin balances, no increase in cash sweep, no increase in credit card revenues, and a decrease in securities lending.
So...what if I assumed that September actually was a strong month where people began trading much more as we hit all time highs? Note, in this more bullish example, I still assumed a decrease in interest on cash & deposits, a decrease in securities lending, and zero change in credit card revenue.
Not going to write out everything as I did above, but the number comes out to be $668M, which would be 43% growth, giving $HOOD 3 consecutive quarters of 40%+ growth.
This is why I like buying the stock around $22.50 and below. Robinhood still has about $5B in cash, putting the enterprise value at $15B, growing at 40%, while having various narratives supporting the overall thesis around a transfer of wealth leading to the younger generation using platforms with strong user experiences and a focus on technology, like Robinhood, for their investing needs.
On top of that, we've got:
- Crypto coming into Q4 which tends to do well post halving for Bitcoin
- A million people on the waitlist for their credit card
- A new event in 2 weeks where they will showcase brand new products including a desktop trading app and futures trading, which would be net new lines of revenue for the company
- A crypto acquisition of Bitstamp and an AI acquisition of a financial LLM company that will materialize into broader growth plans going into 2025
- A macro landscape with China stimulating (think of all the people who owned Chinese stocks on $HOOD that are now trading again) and the Fed likely getting ready to cut rates by another 50bps
The organic growth based on their speed of innovation simply is incredible and is making me more and more convinced that this company understands exactly what they are doing and can push the boundaries to truly build out a first-class platform that users cannot get enough of.
