Key Takeaways

  • Analysts estimate adjusted EPS of -$0.26 for Q2 FY 2021.
  • Investors also will focus on net cumulative funded accounts, which helps measure Robinhood's user base.
  • Revenue is expected to rise on a sequential basis amid SEC scrutiny over payment for order flow, the company's main source of revenue.

Robinhood Markets Inc. (HOOD) recently became a publicly-traded company after its much-anticipated initial public offering (IPO). The online brokerage and its mobile trading app helped pioneer commission-free trading, becoming especially popular among younger retail investors. But the ride has been rocky for Robinhood investors in the nearly three weeks since its IPO, with the stock initially soaring and then falling off its August high. That volatility comes amid controversy over how Robinhood generates most of its revenue, which from payment for order flow (PFOF).

Investors are likely to focus intensely on Robinhood's PFOF and its recent financial performance when it reports earnings for the first time as a publicly-traded company on August 18, 2021 for Q2 FY 2021. Analysts expect the company to report an adjusted loss per share and revenue that is up 7.2% from the first quarter. Much of that revenue is likely to be generated through PFOF.

Investors will also be focusing on Robinhood's net cumulative funded accounts, a key metric reflecting the total number of user accounts containing funds for the purpose of trading stocks, options, and other financial securities on the company's trading platform. Robinhood generates most of its revenue from PFOF, by directing customers' trades to market makers like Citadel Securities and Virtu Financial Inc.

Late last year, Robinhood paid $65 million to settle an SEC probe into whether the company had failed to properly disclose prior to 2018 that it derived a significant portion of revenue from PFOF. Robinhood's involvement in the so-called "meme-stock" trading frenzy earlier this year, which saw shares of companies like GameStop Corp. (GME) skyrocket, has led to renewed scrutiny over PFOF. SEC Chairman Gary Gensler said earlier this year that the SEC planned to review the practice, which is raising concerns that Robinhood's business model could be at risk.

Robinhood's stock debuted on the Nasdaq on July 29, 2021 at a price of $38 per share. The stock finished the day down 8.4%, making it the worst debut ever for an IPO of its size. Robinhood raised about $2 billion in the IPO, which valued the company at $32 billion. The stock shot up during the first week of August closing at a price per share of $70.39 on Aug. 4, but has fallen since then. Robinhood's stock, nonetheless, is up 24.2% from its debut price compared to the S&P 500's rise of about 1.6% over the same period.

One Year Total Return for S&P 500 and Robinhood
Source: TradingView.

Robinhood Earnings History

The amount of earnings data available for Robinhood is limited because the company only recently became a publicly-traded company, which requires it to publicly file its financial results with the SEC. However, in its S-1 filing to register for its IPO, the company disclosed financial results, including for the most recent quarter, Q1 FY 2021, as well as results for the year-ago quarter.

Robinhood posted a net loss per share of $6.26 in Q1 FY 2021, significantly larger than the net loss per share of $0.23 reported in Q1 FY 2020. These losses are based on generally accepted accounting principles (GAAP), a standard required by all U.S. public companies filing financial reports with the SEC. Revenue for the quarter more than quadrupled on a year-over-year (YOY) basis.

Approximately 81% of Robinhood's revenue in the first quarter was transaction-based, which means it was generated by selling its users' stock, options, and cryptocurrency trades to market makers who execute the orders. Transaction-based revenue includes: PFOF, or fees on stock, options; and "Transaction Rebates," which is fees for cryptocurrency trades. PFOF is a primary reason the company is able to offer zero-commission trading to its users.

But the practice is controversial. Supporters claim that PFOF, by allowing brokerages to outsource customer trades to market makers, results in better prices than the national best bid and offer (NBBO) on the official stock exchanges. Critics, such as Gensler, say that PFOF creates conflicts of interest because the brokerage has an incentive to direct trades to market makers paying the highest rebates rather than offering the fastest trades at the best prices.

Analysts expect Robinhood to post an adjusted loss per share of $0.26 in Q2 FY 2021 and for revenue to rise on a sequential basis. Adjusted EPS numbers were not available for Robinhood's second quarters in FY 2020 and FY 2019 to compare with the analyst estimate for Q2 of this year. In general, many companies report adjusted earnings per share (EPS) in addition to the required GAAP EPS. The adjusted figure makes adjustments to the GAAP figure that the company believes better reflects the earnings generated by its core business operations. Excluding one-time expenses is one example of an adjustment. Unless an investor understands how the company arrived at the adjusted figure, no meaningful comparison can be made between adjusted EPS and GAAP EPS.

Robinhood Key Stats
  Estimate for Q2 FY 2021 Q1 FY 2021 Q1 FY 2020
Earnings Per Share ($)  -0.26 (adjusted EPS) -6.26 (GAAP EPS) -0.23 (GAAP EPS)
Revenue ($M) 559.6 522.2 127.6
Net Cumulative Funded Accounts (M) N/A (Data not available) 18.0  7.2

Source: YCharts; SEC S-1 Form.

The Key Metric

As mentioned above, investors will also be focusing on Robinhood's net cumulative funded accounts. The company defines net cumulative funded accounts as total net funded accounts over a given period. A funded account is one in which the account user has made an initial deposit or money transfer during the relevant period. The money in that account is available to be used for various products on Robinhood's platform, such as for trading stocks and other financial securities. The metric provides a measure of the size of the company's user base, specifically a user base that has funds ready to be deployed on the platform. In Q1 FY 2021, Robinhood's net cumulative funded accounts rose 150.0% YOY to 18.0 million. The company estimates that net cumulative funded accounts will rise 129.6% YOY to 22.5 million in Q2 FY 2021. There is no available analyst estimate of the metric for Q2 FY 2021.