Mad Hedge Technology Letter
July 7, 2021
Fiat Lux
Featured Trade:
(SHOULD YOU BUY THE ROBINHOOD IPO?)
(HOOD), (COIN), (PLTR)
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Robinhood (HOOD) is an American financial services company headquartered in Menlo Park, California, known for offering commission-free trades of stocks, exchange-traded, and cryptocurrencies via a mobile app introduced in March 2015.
After perusing their S-1, I can’t help but offer the same recommendation I gave readers for the Coinbase (COIN) listing, which proved to be spot on.
Although this is a real company with real revenues, the growth rates are particularly high because of a one-off phenomenon in alternative asset classes.
I would urge readers to not buy shares of HOOD directly after they are public but instead wait for an entry point sometime after the lock-up period expiration which usually coincides with the insiders and long-time employees unloading shares or a partial trove of them.
The same happened to Palantir (PLTR) which saw a meaningful sell-off upon the lock-up expiration and although PLTR shares are higher today than they were the day of lock-up expiration, it’s better to avoid that dip if you can. PLTR had a big dip when the lock-up expired presenting a great entry point into shares.
Lock-up periods are usually 180 days and I firmly believe this company that will be trading under the ticker symbol HOOD, is not worth paying a premium before that 180-day lock-up period is over.
Don’t be that sucker.
To dovetail with my thesis of not buying HOOD too early is the analysis of their inherent high stakes/ high rewards nature of the business.
Let’s not fudge the details, this is a high-risk business and as of now, they have been handsomely rewarded for it, but that might not always be the case.
They pioneered commission-free trading when the likes of Fidelity and Charles Schwab were still charging $15 to execute one side of a trade.
Why can they offer free trading?
Order history is paid for by third-party high-frequency traders, namely Citadel.
Citadel accounts for 27% of payments for Robinhood retail order flow, and Payment for order flow is 81% of total Robinhood revenue.
The thinking behind buying order flow is to then apply the data through machine learning to even front-run orders of normal retail traders and profit off the spread or micromovements in shares.
They even make markets with their liquidity and trade their own proprietary books.
And yes, this is legal in the United States and companies have gone gangbusters in high-frequency trading (HFT) like Virtu Financial founded by Vincent Viola who owns the NHL franchise Florida Panthers and is big into competing for his horses at the Kentucky Derby.
It obviously pays to do HFT, and if done properly, are great businesses and these are the companies propping up HOOD today.
Robinhood has taken advantage of the Millennial lust to go crypto or go home.
The numbers back me up — $11.6 billion of crypto under custody by the end of Q1.
Bitcoin was the HOOD’s most traded asset in 2020 and the first quarter of 2021 and 17% of total revenue came from crypto in Q1, (compared to 4% in Q420)
In the S-1, it said that HOOD’s business “may be adversely affected, and growth in our net revenue earned from cryptocurrency transactions may slow or decline, if the markets for Dogecoin deteriorate or if the price of Dogecoin declines.”
HOOD and its future success are now uniquely levered towards alternative coin Dogecoin which is now 34% of their total crypto revenue in Q1.
This is the altcoin that Elon Musk joked about, and it explains the 54% growth of 2020 revenue in the first 3 months of 2021.
This is an incredibly high-risk growth strategy that won’t work out every quarter.
HOOD now has 18 million cumulative funded accounts showing the popularity of the business and did $522M in 1Q21 revenue vs. $127.6M in 1Q20 and did $958.8M in revenue in '20 reporting $7.5M in net income.
The median age of customers on HOOD’s platform is 31 and over 50% are first-time investors so if they nurture this customer base, this could be a sticky business moving forward.
If they lead them down this treacherous Dogecoin cliff, it could be trouble and result in terrible quarterly earnings.
A few other risks I felt notable was that Robinhood users went from holding/trading $400M of crypto to $11.5B of crypto from March 2020 to 2021, but HOOD intends to potentially never offer delivery of customer crypto purchases.
This means they are exposed to derivative contracts which just layers on high risk on top of high risk.
Robinhood said there is tremendous regulatory risk for its stock with the company fined $70 million by the securities industry's self-regulator, FINRA, for misleading customers and system outages that the agency said hurt Robinhood's customers.
They said they will likely incur similar fines in the future and investors will need to stomach its predisposition to skirt the law.
There is nothing low-risk about HOOD, and I would wait for a big sell-off after the lock-up expiration to get in at a certain discounted price. Readers shouldn’t blindly pay a premium for HOOD, the risk isn’t worth it.
Mad Hedge Technology Letter
April 16, 2021
Fiat Lux
Featured Trade:
(SHOULD I BUY COINBASE TODAY?)
(COIN), (CRM), (ADBE), (PYPL), (SQ)
For all the cryptocurrency haters in the world, it’s getting harder to take that stand.
I’ll tell you why.
Coinbase (COIN) was the first major crypto business to go public in the U.S. when it began trading at $381 Wednesday morning on the Nasdaq and its IPO symbolizes the acceptance of an alternative digital asset class in technology.
Prior to this watershed moment, the only way to play crypto was through second derivatives plays like PayPal (PYPL) and Square (SQ) who have been handsomely rewarded through higher share prices.
Now, we get the biggest U.S. cryptocurrency exchange trading publicly that will allow exposure to mainstream stock-market investors.
The event has also been tabbed as a catalyst that might drive the adoption of incremental digital assets.
At the very least, this lays down a marker for further crypto-related companies eyeing the Nasdaq after Coinbase’s blowout success.
This also shows that the cryptocurrency infrastructure is developing rapidly and its budding credibility is something that needs to be acknowledged.
The Coinbase IPO was also the catalyst in sending bitcoin prices to almost $65,000.
No doubt that the appreciating asset has been the most attractive use case for the incremental investor and cryptocurrency buyer.
Many early investors who got into bitcoin at 20 cents are now billionaires many times over.
After such stunning success, it’s hard to believe that any fintech or cryptocurrency start-up would ever consider doing their IPO anywhere else but New York.
New York has the liquidity, the US dollar, and the capacity to receive such type of growth companies in bulk.
This is not only an emphatic victory for digital assets, but also for the US tech sector and a stamp of validation for the Nasdaq market.
Ironically enough, even during this trade war, Chinese tech companies are clamoring to go public in New York and not mainland China for the above reasons.
Here are a few other highly positive data points to digest that were talking points in their S-1 filing.
The overall market capitalization of crypto assets grew from less than $500 million to $782 billion between December 31, 2012, and December 31, 2020, representing a CAGR (compound annual growth rate) of over 150%.
Over the same period, Coinbase retail users grew from less than 13,000 to 43 million, a 175% CAGR.
I believe the total market cap of crypto is now around $2 trillion in April 2021.
And more recently, Coinbase has experienced significant growth in the number of institutions on their platform, increasing from over 1,000 as of December 31, 2017, to 7,000 as of December 31, 2020.
Bitcoin reported a nine-fold increase in Q1 revenue, to $1.8B, up from $190.6M the previous year.
Just like Google and Facebook benefit from a duopoly, Coinbase will benefit from being the only pure cryptocurrency option on the Nasdaq and that will put a floor under shares in the short-term.
The growth metrics of the company are also robust via a helping hand by the increasingly expensive price of bitcoin.
No doubt that this company’s prospects are tied to the hip with the prices of cryptocurrencies.
If the price of bitcoin retraces to $30,000, which it could because of the high volatility of it, expect Coinbase shares to dive with it.
This for all intents and purposes is a bet on the health and price trajectory of bitcoin for better or worse until other crypto-based choices are introduced which would give more layers and complexity to this sub-sector.
Bitcoin calls out Binance which they state as a competitor and Kraken is another exchange that is large and vying for the same capital.
I believe these two companies have a chance to go public and that is when you will really see the institutions jump on this crypto bandwagon.
More options and a foundational investment base will also promote stability in this new technology sub-sector.
Should you buy Coinbase today?
No.
I understand Coinbase’s growth metrics are off the charts with revenue growing 900%, but it’s not worth $100 billion market cap on just $1.8 billion of quarterly sales.
Investors would need solid tailwinds such as bitcoin passing $100,000 in 2021 for this company to be worth $100 billion and I just don’t see it.
Then also understand the cybersecurity and possible regulations are two risks that could blow up the business model at any moment which would take down the premium in the stock.
Yes, the meteoric rise of crypto at the start of 2021 has turned heads, but as the economy reopens, I do believe money will rotate from crypto back into traditional technology that is underpinned by cash cow businesses.
Highly profitable companies that aren’t FANGs are also set to deliver share appreciation to shareholders such as Salesforce (CRM) or a company like Adobe (ADBE) who earn profits of $5.27 billion on $13 billion of annual revenue.
I acknowledge that Coinbase’s IPO was the perfect time to go public.
They are taking advantage of easy money and low rates while the acceptance of this alternative asset class has never been higher.
However, I don’t see any more incremental growth in the short term and the stock is more than fully priced today.
The risk-reward is not favorable to pile into this stock now unless you have a bullish 50-year view on crypto and can’t wait.
This stock will go through volatility because of the inherent dynamics they are tied to and I would seriously look at buying Coinbase only on a massive sell-off.
Don’t go chasing unicorns.
At the end of the day, this is a real company with real revenue growth of 900% year-over-year. Slice it up anyway, and these numbers are numbers that attract investors, but the stock is too expensive right here.
