Robinhood stock closed at an all-time high of $ 70.39 in August 2021, but is now trading around $ 10. Similarly, Affirm stock hit a record high of $ 168.52 in November 2021, but is now worth only around $ 12. Both stocks plummeted when obvious weakness emerged.
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Robinhood's growth stalled when the meme-like stock mania, largely fueled by stimulus checks and social media hype, abruptly ended. Rising interest rates also drove investors away from the riskier options and cryptocurrencies that fueled Robinhood's growth. Affirm struggled as more companies launched their own BNPL services, inflation held back consumer spending, and its default rates soared. Should investors buy one of these falling stocks as a turnaround play?
What happened to Robinhood?
Robinhood subsidizes its commission-free trading by selling its customers' orders to high-frequency trading firms, which profit from the bid-ask spread on each order. This "payment-for-order flow" business model has come under scrutiny from the Securities and Exchange Commission (SEC), but the agency has no plans to ban the practice any time soon.
Robinhood's revenue jumped 891,000 to $1.82 billion in 2021 amid a buying spree of growth stocks, meme stocks, and cryptocurrencies. But in 2022, its revenue fell 251,000 to $1.36 billion as it sold out.
The platform's monthly active users (MAUs) peaked at 18.9 million in Q3 2021 but fell to just 11.4 million by the end of 2022. During this period, the number of net cumulative accounts increased from 22.4 million to 23.0 million, but its total assets under custody (AUC) plummeted from 95 billion to 62 billion. This implies that the average size of each Robinhood account (calculated by dividing its AUC by its funded accounts) fell from 4,259 to 2,696.
As Robinhood's growth cooled, its profits plummeted. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 781TP3Q to $1TP4Q in 2021, and fell to a loss of $1TP4Q in 2022. But this year, analysts expect its revenue to increase 341TP3Q to $1.8 billion, with a positive adjusted EBITDA of $1TP4Q. These estimates should be taken with a grain of salt, but its outlook could improve as the market heats up again and it continues to cut costs.
What happened to Affirm?
Affirm breaks individual purchases into smaller installments, approving "microloans" for individual customers. This makes it an attractive option for younger, lower-income shoppers who might not be approved for traditional credit cards, as well as a cheaper alternative to credit card swipe fees for merchants.
In fiscal 2022, which ended in June, Affirm's revenue increased 55% to US$1.3 billion, its number of active customers increased 96% to 14 million, and it acquired new partners such as Amazon, TargetAND American AirlinesThis expansion reduced Affirm's overall reliance on the struggling maker of connected fitness devices. Platoonwho was once his main client.
But in the first half of fiscal 2023, Affirm's revenue grew only 21% year-over-year to $$ $630 million, as macro and competitive headwinds intensified. Its active customers grew 39% to 15.6 million, its transactions per customer improved, and its 30-day delinquency rate held steady at below 3%, but it expects its revenue to grow only between 13% and 19% for the full year.
This slowdown wouldn't be a major concern if Affirm were profitable. But its net loss widened from $1.5T441 million in fiscal 2021 to $1.5T707 million in fiscal 2022, and analysts expect an even larger loss of $1.1T1 billion in fiscal 2023. This red ink indicates that Affirm needs to increase its trading fees to break even, but doing so could drive these customers to other BNPL services, such as PayPal's Pay in 4 o BlockAfterPay's – both are loss-leading extensions of more diverse fintech ecosystems.
The obvious winner: Robinhood
Robinhood is trading at five times this year's sales, while Affirm is trading at about double its fiscal 2023 sales. Robinhood may seem more expensive, but it's probably a better bet than Affirm because it has a clearer chance of a return.
Robinhood is still dangerously dependent on smaller, more fickle retail investors who enjoy trading cryptocurrencies and volatile options (which accounted for 88% of its trading revenue last quarter), but its growth could accelerate rapidly once the market ends lower. I can't make the same plea for Affirm, which has yet to demonstrate that its business model is sustainable.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool's board of directors. Leo Sun holds positions at Amazon.com. The Motley Fool has locations and recommends Affirm, Amazon.com, Block, PayPal, Peloton Interactive, and Target. The Motley Fool recommends the following options: Short April 2023 $ 70 puts on PayPal. The Motley Fool has a disclosure policy.
