Fintech companies are jumping on the initial public offering band wagon. Both SoFi Technologies Inc. (NASDAQ: SOFI) and Robinhood Markets Inc. (NASDAQ: HOOD) are holding IPOs.
Of the two, Mr. Market likes the controversial trading app Robinhood (HOOD) best. Robinhood started trading at $34.82 on 29 July 2021, rose to $70.39 on 4 August 2021, and fell to $49.80 on 18 August 2021. In comparison, Mr. Market was paying $14.22 for SoFi (SOFI) shares on 18 August 2021.
SoFi vs. Robinhood
The difference between SoFi and Robinhood is that SoFi is primarily a lender, while Robinhood is a trading platform.
SoFi offers student loan refinancing, private student loans, personal loans, home loans, auto loans, investing, credit cards, auto loan refinance, renter’s insurance, homeowner’s insurance, auto insurance, life insurance, estate planning, and small business financing. Thus, I consider SoFi one stop shopping for consumer finance.
SoFi claims its platform has over two million members. SoFi also claims to have issued over $50 billion worth of funded loans and to have received $22 billion in debt payments.
Demand for SoFi’s services could be high. For example, Student Loan hero estimates 44.7 million Americans had $1.7 trillion in student loan debt in January 2021. Hence, there could be 44.7 million customers for some of SoFi’s services and up to $1.7 trillion in debt could refinance.
Robinhood vs. SoFi
Robinhood (HOOD) is one of the fast-growing platforms around. For example, Statista estimates Robinhood added three million users in 2020.
In detail, Robinhood began with 500,000 users in 2014 that number grew to two million in 2017, six million in 2018, 10 million in 2019, and 13 million in 2020, Statista estimates. Robinhood generated $682 million in payment-for order flow revenue in 2020, Business of Apps claims.
Payment-for-order flow is Robinhood’s primary source of money. In payment-for-order flows, trading platforms pay for the privilege of executing hundreds of thousands of Robinhood trades.
Robinhood had $80 billion in assets under management in 2020, Business of Apps estimates. The average Robinhood customer had $3,500 in her account in 2020, Business of Apps estimates. In contrast, the average Charles Schwab (NYSE: SCHW) account was worth $240,000.
How Much Money Does SoFi Make?
SoFi Technologies (SOFI) loses money. SoFi reported a -$5.29 million quarterly operating loss on 31 March 2021. In addition, SoFi reported an operating cash flow of -$1.67 million and a quarterly ending cash flow of $40,000 on 31 March 2021.
SoFi’s value is minimal. It had $805.82 million in Total Assets on 31 March 2021. In addition, SoFi had $40,000 in cash and short-term investments and $1.42 million in total debts on 31 March 2021.
I think Mr. Market overvalued SoFi at $14.80 on 18 August 2021. I advise smart investors to stay far away from SoFi.
How Much Money Does Robinhood make?
In contrast, Robinhood Markets (HOOD) makes a little money. Robinhood reported a $481.17 million quarterly gross profit and a quarterly operating income of $58.39 million on 31 March 2021.
Moreover, Robinhood reported $522.17 in quarterly revenues on 31 March 2021. The quarterly revenues grew from $317.54 million on 31 December 2020 and $127.55 million on 31 March 2020.
Interestingly, Robinhood burns and generates enormous cash at the same. It reported a quarterly operating cash flow of -$1.992 billion on 31 March 2021. Yet, it also reported a quarterly ending cash flow of $7.854 billion on 31 March 2021.
Yet, Robinhood borrows enormous amounts of money. It reported a quarterly financing cash flow of $3.668 billion on 31 March 2021.
What Value does Robinhood Have?
Unlike SoFi (SOFI), I think Robinhood (HOOD) offers some value. For example, Robinhood had $7.872 billion on in cash and short-term investments on 31 March 2021.
That value is growing, the cash and short-term investments grew from $6.317 billion on 31 December 2020. Moreover, the Total Assets grew from $10.988 billion on 31 December 2020 to $15.104 billion on 31 March 2021.
Impressively, Robinhood’s quarterly revenues grew from $127.55 million on 31 March 2020 to $317.54 million on 31 December 2020 to $522.17 million on 31 March 2021. The revenue growth is impressive. Stockrow estimates Robinhood’s revenues grew by 309.39% in the quarter ending on 31 March 2021.
However, I consider Robinhood a dangerous company because its debt is exploding. For example, Robinhood’s Total Debt grew from $1.975 billion on 31 December 2020 to $6.768 billion on 31 March 2021.
Thus, I think Robinhood is taking on debts it could never repay. I think that gives Robinhood a low margin of safety. Hence, I conclude that Mr. Market grossly overvalued Robinhood at $49.80 on 18 August 2021.
Robinhood will collapse
My suspicion is that Robinhood (NASDAQ: HOOD) could collapse at any moment because it takes on enormous amounts of debt. My prediction is that Robinhood will collapse and be bought by a monster bank or an investment bank.
My guess is that an organization such as Goldman Sachs (GS) will buy Robinhood for its technology, trading platform, and customer list. Similarly, I think somebody will buy SoFi Technologies (SoFi) and customers.
In the final analysis, I think Robinhood and SoFi cannot compete with monster banks such as Wells Fargo (WFC) and investment banks such as Goldman Sachs. I think investment banks and monster banks will crush Robinhood and SoFi because they can get access to enormous amounts of cash.
For example, Goldman Sachs (NYSE: GS) had $590.666 billion in cash and short-term investments on 30 June 2021. In comparison, Wells Fargo had $427.049 billion in cash and short-term investments on the same day.
I cannot see how either Robinhood or SoFi can compete with those cash-rich giants. Thus, I investors to stay far away from Robinhood and SoFi.
Originally published at https://marketmadhouse.com on August 18, 2021.