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Christian Bolu, analyst at Autonomous Research, breaks down Robinhood's latest earnings report.
- We're going to go back to one of the earnings we got. And it's one a lot of people have been expecting. Robinhood shares right now, after market, down almost 10%. Not the expectation, not the earnings that Wall Street was expecting. And to discuss this, and what might have happened, we bring in Christian Bolu. He is a research analyst at Autonomous.
It's good to have you here. And I want to quote from a note that you sent your clients, that the fight is underway to provide financial services for a new generation, the millennials and Gen Z, as well as historically underserved demographics. Should we infer from this report that they're missing that opportunity? Or this is just the beginning of a long process?
CHRISTIAN BOLU: Yeah. Thanks for having me on. Look, anytime you miss the top line by 15%, you deserve to be down quite a bit. So I think the reaction in the market is today. But, to that longer-term point around increasing financial access for quite a huge swath of Americans, and quite frankly, folks globally, that's a really long term opportunity that I don't think has changed because of what's happened today. I think what we're seeing here is more of a short term issue than a longer term problem for the company.
- So Christian, with that in mind, because crypto activity declined from record highs, the company said, in the prior quarter. And we know that Robinhood has laid out plans for an upcoming crypto wallet. How important is crypto in the growth story here for Robinhood?
CHRISTIAN BOLU: Crypto is absolutely critical. So look, I would say, remember two thirds of the crypto volume last quarter was Dogecoin alone. So just that decline in would account for most of what's happened was a decline in the crypto revenues. The longer term point around crypto is around the monetization opportunities. If you look at peers like a Coinbase, or a company called Voyager Digital, who both have much more expansive crypto offerings. There are pools are north of $1,000 in account. Robinhood's entire ARPU in this quarter was only $65. So to the extent Robinhood can really bring out a much more scaled, much more robust crypto offering, we think there's a lot of incremental monetization opportunity over time.
- For a lot of investors who may be taking a look at Robinhood for the first time, when you look at monthly active users up 76%, assets under custody up 115% now to $95 billion. Which is the metric you would want a client or an investor to pay attention to, one or two from this report?
CHRISTIAN BOLU: Yeah, I think the most important metrics in my view are one, the funded accounts or active users. They tell you roughly the same thing. And look at how it has grown year over year and also the average revenue per user the ARPU, which tells you how much money they're making per user. I really think those are the two big metrics to watch. Look, in the quarter, on a sequential basis, you did see a decline in active users and funded accounts, which is disappointing. But to your point, on a year over year basis, you're still seeing pretty, pretty strong growth.
- Christian, the earnings call is going to get underway in just about 30 exactly 30 minutes from now. The payments for order flow, we know that that's likely going to be a popular topic, or at least we expect some commentary on this. Yesterday, we had our own [? Markets ?] [? Summit ?] [? in ?] SEC chair Gary Gensler. He was on with Brian Cheung and he was saying that banning the practice is a potential possibility. We know that Robinhood has been trying to diversify and move away from payment for order flow as a revenue generator. But are they doing this fast enough?
CHRISTIAN BOLU: Yeah, I don't worry enormously about payment for order flow regulation risk. And ultimately, the flow has value if payment for the flow itself is bad, there are other ways Robinhood can monetize that customer flow. So I think one way or the other, they will be able to monetize the flow. So I am not particularly worried about that piece of the equation. But you make a good point around diversification. I do think over time if you look at the scaled brokers, like a Schwab, the vast majority of revenues come from asset based or net interest income. So things like revenues from managing clients' assets or revenues from monetizing client deposits, which are far more sort of stable and visible. So I think over time you would expect Robinhood to have more of its revenues come from those sources to balance out some of the volatility that you've seen in revenues currently.
- Christian, you pointed out that you'd want to look at average revenue per user and it decreased in the quarter 36% to $65, compared to $102 in the same quarter a year ago. How do they turn that around?
CHRISTIAN BOLU: Yeah that's one of the most [INAUDIBLE] parts of the earnings print today, I would say. But again, you know, you asked a question earlier on, around opportunities and I pointed to crypto and Coinbase and Voyager Digital, having average revenue per users of north of $1000. And I think ultimately, that's a really big opportunity for Robinhood over time to get that 65 much higher than it is today. So I would say crypto is one, but ultimately the other issue for Robinhood is, you know, the accounts are fairly small. The average account is about just north of $4,000. The median account is even smaller than that. So you would have to sort of grow the customer base to have a lot more assets per account as well, to be able to increase monetization per account.
- So Christian, we're looking at an 8% drop here after hours. Do you think then with everything that you've said kept in mind, is this a bit of an overreaction, just given the growth opportunities that you do see for Robinhood going forward?
CHRISTIAN BOLU: No, it's not an overreaction at all. They missed fairly badly on top line and on some key metrics. So it is not an overreaction. I think it's a mixed, surprisingly, 8%. But that doesn't take away from the longer term opportunity for those who are staying power in the stock. Ultimately, the point that we've made here is that something like 200 million folks in America, that have basically been underserved by traditional financial services players, Robinhood along with some of the other money apps have come into the market, are serving those folks. There's a lot of money to be made for Robinhood, as well as those money apps. And ultimately, I think increasing financial access is a good thing for wealth building over time. So I think that opportunity hasn't gone away. It's a longer term one. It's one that might take maybe a bit longer term to play out than we thought. , But it really hasn't gone away. So we do still like the stock.
- And we appreciate your insight on all of this. Christian Bolu, Autonomous research analyst, do come back.