Robinhood Markets - Why A Rising Tide Didn't Lift All Boats

He said to them, “But who do you say that I am?” Peter answered and said to Him, “You are the Christ.”

Mark 8:29

As a Christian, the entire premise of my belief and faith is predicated on the life, death, and resurrection of Jesus Christ. The apostles clearly believed in Jesus as they spent all their time with Him. They may not have immediately understood the gravity of His death and resurrection, but soon after, they were fully committed as Jesus appeared on numerous accounts to them after His death on the cross. The test for all is to consider the testimony of Jesus and if they disagree to prove it wrong.

The stock market is filled with many misconceptions and falsehoods that are driven by emotional trading reactions. I find it important to always pay attention to the fundamentals to find the greatest degree of truth versus the continual and resounding distractions and noise. Social media has become a primary mechanism for retail investors to reaffirm emotional reactive tendencies. Seeking fundamental truth, like the testimony of Jesus Christ must be disproven or else all distractions and noise will overshadow investment decisions.

Robinhood Markets, Inc. (HOOD) reported their results and the stock price jumped by double digits the following day. Coinbase Global, Inc. (COIN) also reported their results, and the stock price dropped nearly 10 percent the following day. While HOOD was cheered for its trading revenue results including its Crypto performance, COIN’s performance was written off as a one-time President Trump bump.

While there are numerous reasons as to why Wallstreet is pushing against the Crypto narrative, it begs the question as to why HOOD was given a pass. First, Wallstreet is clearly biased towards keeping artificial intelligence, or AI at the forefront for the momentum trade. Second, Wallstreet knows that Crypto poses a real threat to the traditional financial system and will continue to defend this on the surface but position itself for the shift that will inevitably occur. Lastly, to directly answer the HOOD question, Wallstreet is placing a premium on HOOD’s more diversified trading revenue segments.

HOOD continues to increase its Crypto trading revenue as a percentage of the total Crypto trading revenue when adding COIN into the mix. Despite the increase in Crypto trading revenue percentage, HOOD’s Crypto assets under custody reflected only one percent of the entire global Crypto market ($192 billion), whereas COIN’s assets on platform reflected nearly 12.5 percent ($404 billion).

A far more egregious issue is the comparison of HOOD and COIN’s trading revenue percentage of total net revenue. In the past, Wallstreet has been critical of COIN’s higher reliance on trading revenue due to the expectation that fees to trade Crypto will decline to zero over time. However, HOOD finds itself in the very same position as COIN for this topic and yet HOOD’s stock price was rewarded for this similar performance.

To further clarify, COIN has witnessed increasing trading revenue take rates or fees associated with both consumer and institutional revenue over the years, notably since 2021. There will be an inflection point when Crypto becomes more engrained into financial systems and transactions of goods and services resulting in exponential increases in consumer and institutional volume which will serve to drive fees towards zero. But at the same time, network-related transactional fee opportunities will emerge, and other non-trading revenue will spike much higher generating more massive opportunities over time. Retail investors need to recognize that the financial sector offers tens of trillions of dollars in addressable market opportunity for Crypto.

The final issue that undermines Wallstreet’s logic here is the valuation comparison for HOOD and COIN. As can be seen above, HOOD is trading at over 16 times EV/Sales and around 150 times adjusted OCF per share. This compares to COIN trading 10 times EV/Sales and just below 28 times OCF per share.

Crypto will continue to be a focal point and when the U.S. government begins the regulation process more thoroughly, we will likely see an influx of Crypto accounts leading to both higher assets on platforms and increased trading volumes over the mid-term. The other core factor is that at some point, the AI trade will pivot to a sell-off. This might even occur as soon as next week as NVIDIA’s earnings report is forthcoming. There is also an increasing sense and feeling that the AI trade may be getting a little longer in for retail investors (it's been pumped since 2022), and the broader market rally also could witness a fairly strong correction in the coming months.

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