Confetti 🎉 Credit⚡️Crypto₿

Robinhood. Affirm & Coinbase IPOs!

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Over $150 billion was raised by IPOs & SPACs in 2020.

It was spectacular year not seen since the dot-com era, with 19 IPOs doubling on the first day of trading.

2021 is shaping up to be a big year, too:

This week I cover 3 exciting FINANCE IPO’s:

Money 👉 Decentralized 👉 COINBASE
Credit 👉 'Buy Now Pay Later'👉 AFFIRM
Investing 👉 Gamification 👉 ROBINHOOD

Let’s get cooking!

Coinbase: ‘Exchange for the Rebels’

Coinbase is about to make history and it’s going to be glorious!

No better way to legitimize the entire crypto industry than to IPO under the strictest regulator in the world - the SEC.

Highlights:

• Founded in 2012

• 35MM users, 100 countries & 1k employees

• Largest crypto exchange in the U.S.

• 2nd-largest in the world (after Binance)

• Funding to date +$500MM

Business Model.

Generates bulk of its revenue from trading commissions.

Over $320B in volume traded to date.

Revenues or profits have never been disclosed.

Controversy.

Coinbase has not been without controversy. Most recently:

“Coinbase Hands Nearly $1M to Cryptsy Victims After Settling Class Action Lawsuit”

“Class action alleges Coinbase acted unlawfully and fraudulently in listing XRP”

But…

The most consistent issue to date has been the platform’s frequent outages.

Which used to upset clients. But now, since they are so synonymous with bitcoin price spikes, they’ve grown to be kinda loved by the community.

Hopefully, a fresh round of IPO capital means an upgrade to their tech.

Valuation.

Is Coinbase worth $8B or +$70B?

Coinbase’s last financing round was $300MM in October 2018 at $8B valuation.

But, according to its pre-IPO futures contract, it’s valued at +$70B!

For all you ‘YOLO’ traders out there they offer pretty nutty margin on this contract:

“With spot margin, up to 5x”

From what I gather online, the smart money is calling for closer to $30B valuation on the IPO.

Growth.

Coinbase has been growing quickly in the last 12 months as bitcoin’s +300% bull run has everyone feeling the FOMO.

They added 5MM new users including consumers but lots of institutions, too. And particularly millennials.

Money movements have confirmed the ‘Gold Bugs’ worse nightmares. Now directly competing for capital with what they believe to be a ‘tulip bubble.’

“Bitcoin’s competition with gold has already started in our mind as evidenced by the more than $3B of inflows into the Grayscale Bitcoin Trust and the more than $7B of outflows from Gold ETFs since mid-October,” -JP Morgan

In terms of market penetration, it also seems like early days for Coinbase.

I am also thinking a takeout down the road is likely. It’s a nice bolt on for an investment bank who doesn’t know what they are doing when it comes to crypto.

Could we see JP Morgan, who recently boldly changed their tune on bitcoin, take them out?

Grit’s Take:

An exchange on its own is not sexy to me.

But, if it’s an exchange trading novel assets like Coinbase with crypto or billion-dollar tech StockX with limited edition sneakers, I am intrigued.

Given the IPO filing isn’t available yet, I am going to use numbers floating around the public realm and valuation methods I envision powerful minds might use.

So, let’s have some fun with numbers !

I see upside here, particularly if the IPO goes out at $30B like the smart money has been saying.

Unless you only value companies like Buffet, then maybe it’s a short!

Affirm: Buy Now. Pay Later.

Awe, the backbone of the U.S economy: Consumer Credit.

It’s a glorious invention that makes the world go round. Especially at 2am after downing a couple bottles of wine.

“Drunk Americans spend a total of $30B online each year”-NBC

Luckily there’s a new ‘credit kid’ in town called Affirm.

Led by the ‘PayPal Mafia,’ built with fresh FinTech plumbing and a sexy coat of digital and mobile-first paint.

Affirm is a financial lender of instalment loans for consumers to use at the point-of-sale.

Huh?

Think of buying a Peloton. But instead of paying cash (you don’t have) or using credit card (crazy fees) use an Affirm instalment loan and repay over 6 weeks to 48 months.

Use it to finance everything from air travel to sneakers.

While shopping everywhere form Walmart to Shopify.

Highlights:

• Launched in 2016

• 6.2M customers and 6.5k merchants

• $10.7B purchases funded to date

• Last raise $500MM at $5B-$7B valuation

What problem is Affirm solving?

Affirm should be called the ‘anti-credit card’.

Credit cards are a gift and a curse. Sure, they let us buy things with money we don’t have. But the fees are a huge downfall:

“Americans owe a total of $1T in credit card debt today. They have $121B in credit card interest, $11B in overdraft fees, and $3B in late fees.”

Affirm doesn’t charge ANY fees beyond interest. No late or overdraft fees.

So, you are less likely to fall victim to a downward spiral of crippling debt.

Growth.

COVID was a huge benefit for Affirm.

With 10 years of digitization compressed in less than 5 months, Affirm’s revenue almost doubled to half a billion.

“People are changing their habits very rapidly and the most powerful trend is figuring out what can be purchased online instead of having to go outside.” -CEO of Affirm

But they aren’t profitable yet. They lost over $100MM last year.

From their financials I can see they’re generating a nice profit on their loans (green circle minus red circle).

But here’s, the problem the company spends a lot on G&A and Technology (red arrows). If the bulk of this can stay fixed as they scale they have a shot at becoming profitable.

Competitive Advantage.

One of the biggest risks to lending is getting paid back.

I learned this first-hand working as a consultant for a consumer lender. One of the companies I analyzed lent people money for breast implants and veneers. As you can imagine, if customers didn’t pay back you couldn’t just go repossess the asset. So losses in a business like this can be quite high.

Which is why the competitive advantage Affirms claims to have is intriguing.

Pricing risk better than the competition.

“One of its key competitive advantages is its risk model ‘built on more than a billion data points’ that looks at risk at the “transaction level” by taking into account the item that a customer is purchasing.”

Affirm claims that it’s able to approve 20% more customers on average than its competitors and that their “delinquency rates are at one-fifth of a credit cards”.

Time will tell if this holds true.

Market Size & Competitors.

There is strong competition in this space.

“it’s estimated that 3% of (eCommerce sales) will be paid via “buy now, pay later.” This means the 2023 North Americans total addressable market (“TAM”) is ~9x larger than Affirm’s $4.6B in transactions today.”- Shelley Olivia

Risks.

Two big risks I see:

1)   Customer Concentration: 30% of their revenue comes from 1 customer: Peloton.

2)   Lender Concentration risk: Almost entirely with 1 lender.

Grits Take.

I know WAY too much about lending to be a fan of this business model. Here are my concerns:

1.   ‘Moatless Castle’: Affirm doesn’t have anything proprietary, although, they claim to have better tech to analyze risk. I am not sure I buy it.

2.   Valuation: At $9B and 20x revenue with no profits. I have trouble getting my head around it. PayPal trades at 13x but it’s profitable. Shopify trades at +40x but it’s got profits AND innovation.

3.   Failures: In lending, the body count is bigger than the graveyard. Unprofitable, lenders, don’t make great stocks. In October, OnDeck fell victim to a take-under at $90MM valuation, way down from its $1.3B IPO.

Exception: PROFITABLE lenders can do very well. GoEasy is a great example, they have been profitable for nearly 20 years and their stock has done phenomenally well returning +7,500%.

4.   Lockups: the CEO owns ~$1B worth of stock (locked up for next few months) and Shopify has warrants that strike at pennies worth $1B (using IPO price). The quote feels a bit heavy here.

The company is going public Wednesday - let’s see how it does!

Robinhood: “Take from the Rich. Give to the Poor”

If it takes confetti exploding on an app to get millennials interested in the stock market, I am all for it.

The earlier you start investing, the better off you’ll be because of that beautiful thing called compounding.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” - Warren Buffet

Sure, there’s aggressive day trading and options buying behaviour going on.

And no doubt, when the next correction comes there will be losses. But, let’s put it in perspective. If 30% of Robinhood investors got wiped out, that’s equivalent to less than 1 mid-sized cannabis company.

Now, let’s talk about how two former Wall Street software geeks created a digital mammoth!

Highlights:

• Founded in 2012

• 13MM users

• $20B AUM

• Stock trading, ETF’s, options & crypto

• Revenue ~$700MM

• Last Financing $460MM in Sept. 2020 at $11.7B

How does Robinhood make money?

We’ve all seen the headlines:

“Robinhood makes millions selling your stock trades … is that so wrong?” - Fortune

And yes, it’s true. They make a lot of money selling your trades. But so does every other brokerage firm.

‘Payment for order flow’ is standard practice in the industry. The SEC has found that clients can actually benefit from better pricing on trades.

The issue is Robinhood profits 4x more than most using this practice. Translation – they share less of the savings with their customers.

“70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab.” - Forbes

Which is why they had to pay a $65MM fine. The SEC found that customers lost $34MM by not receiving best execution.

Ironically, this is way less than what customers saved NOT HAVING TO PAY TRADING COMMISSIONS!

Retail Trading Frenzy.

COVID, money printing, stimulus cheques and a raging bull market were the perfect storm for Robinhood’s growth.

Revenue spiked +250% year-over-year and so did the meme action on social media!

Valuation.

Robinhood has raised $2B to date. With a rumoured $20B IPO valuation all the VCs stand to make a strong return. Even those who just invested at $11B back in September.

Let’s do some simple math here.

The average customer acquisition cost for finance firms - banks, wealth management & FinTech is: $1-3k/customer.

Using this, Robinhood’s $20B IPO valuation seems reasonable at ~$1,500/customer.

Back in March, Morgan Stanley paid $2,500/customer for eTrade. Admittedly it came with 10x more AUM (at the time) & profitability.

I think a big emphasis needs to be placed on Robinhood’s growth. For example, it took Charles Schwab 49 years to get the same customer base it took Robinhood  <8 years.

Having said that, the AUM of the other platforms are much greater than Robinhoods and therefore their customers are worth more.

Grit’s Take.

I think there’s strong growth ahead for Robinhood.

Millennials are set to inherit over $68 trillion dollars from their Baby Boomer parents by 2030.

“This will represent one of the greatest wealth transfers in the modern times.”

Many of them won’t want ‘their father’s or mother’s brokers’.

Also, Robinhood customers are much more active. Which could make up for some of its lack of size.

But they need to focus on profitability by expanding into revenue lines like consumer finance: credit cards, mortgages, insurance etc.

I think Robinhood has a decent chance of eventually getting acquired. Or it could do well as a stock too. Reminds me of when Interactive Brokers went public at $30/share in 2007.

IPO.

Get your popcorn ready!

In the ultimate ‘turn-the-Wallstreet-IPO-on-its-head’ scenario, Robinhood is considering letting its own customers invest in the IPO.

This means the big institutional money might be forced to buy on the first day of trading and pay up! Like retail is used to doing.

Simple math suggests Robinhood can easily raise $1-2B from its own 13MM users investing $100-200/each in the IPO.

I sure hope Robinhood & Coinbase don’t IPO on the same day. It could mean complete madness with both platforms going down at the same time ; )

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S Be careful listening to the Financial Times, Forbes or JPMorgan, they called Bitcoin a bubble at $138, $2,600 and $4,000 respectively!

SOURCES: Linas Beliūnas (@linasbeliunas) (BITCOIN), JPMorgan, CNBC, Shelley Olivia, Morningstar, Business of Apps.

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What else we Grittin’ On:

Gritty Press: Two awesome stories published about us in the last few weeks. Check them out: The Peak and Macro Mail.

Digital Sheriffs. Twitter, Facebook, Google, YouTube, Instagram, Shopify, Reddit, TikTok, Snapchat, Spotify & Pinterest - all restrict or ban Trump!

Supercycle. Goldman proclaims the dawn of a new commodity supercycle!

U.S Consumer. “Is in the best financial shape in modern history”. Americans have less credit card debt today than they did in 2007, despite an economy that’s 48% larger and has 30 million more people.

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