Robinhood’s huge, two-part Series F round came partially in Q2 and partially in Q3. The app-based trading platform announced the first $280 million in early May, valuing the company at around $8.3 billion, up from a prior price tag of around $7.6 billion.
Then in July, Robinhood tacked on $320 million more at the same price, raising its valuation to around $8.6 billion.
While it has long been known that savings and investing apps and services are seeing a boom in 2020, precisely what caused investors to pour $600 million more into this already-wealthy company was less immediately evident. Recent data released by Robinhood concerning one of its revenue sources may help explain the rapid-fire capital events.
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Filings from Robinhood covering the April through June period, Q2 2020, indicate that the company’s revenue from payment for order flow, a method by which a broker is paid to route customer orders through a particular group, or party rose during the period. As TechCrunch has covered, Robinhood generates a sizable portion of its revenue from such activities.
The company is hardly alone in doing so. As a new report from The Block, shared with The Exchange ahead of publication notes, Robinhood’s Q2 payment for order flow haul was impressive, but not singularly so; trading houses like E*Trade and Charles Schwab also grew their incomes from order flow routing in the period.
But Robinhood’s gains come in the wake of the firm’s promise to shake up its options trading setup after a customer took their own life. As we’ve written, there is a tension between Robinhood’s desire to limit who can access options trading, its need to grow and the incomes options-related order flow can drive for the budding fintech giant.
This morning, however, we are focusing on revenue growth over other issues (more to come on those later). Let’s dig into Robinhood’s Q2 order flow revenue numbers and see what we can learn about its run rate and current valuation.
A big Q2
According to The Block’s own calculations, Robinhood saw saw its total payment for order flow revenue roughly double, rising from $90.9 million in Q1 2020 to $183.3 million in Q2 2020, a 102% increase.
By The Block’s math, Robinhood’s $183.3 million was powered by $114.3 million in options-related payment for order flow. Doing our own sums, on a per-month basis that worked out to the following:
- Total Robinhood options revenue, April: $29.2 million.
- Total Robinhood options revenue, May: $30.8 million.
- Total Robinhood options revenue, June: $50.7 million.
TechCrunch came to a slightly different result than The Block for the total Q2 2020 Robinhood options-related payment for order flow at $110.6 million, but the two numbers are close enough for the directional work that we have in mind.
A $183.3 million quarterly run-rate for payment for order flow puts Robinhood on a $733.20 million yearly run-rate from the single product — user trade routing — alone. The company also generates income from a subscription service, among other techniques. But the growth alone from its order flow payment business makes the unicorn’s valuation multiple increasingly attractive.
At its Q1 payment for order flow yearly-run rate, Robinhood’s current revenue multiple while discounting other revenue sources was around 23.4x. At its Q2 order-flow annualized run-rate that figure falls to 11.7x. Toss in Q3 growth from order flow incomes (given that June was the best month of Q2, presuming a stronger aggregate Q3 result seems reasonable) and other revenues, and Robinhood’s real annualized run-rate multiple could easily slip under the 10x mark in the third quarter.
Or, more precisely, the market’s trading boom means that Robinhood is rapidly growing into its recently raised valuation.
For the investors that have put around $1.5 billion into the company, per Crunchbase data, that’s good news. For Robinhood, the situation from the outside looks increasingly difficult. Given the huge revenue success of the product line, limiting access — and thus incomes — may not prove very attractive.
After this column lightly criticized Robinhood’s announced platform changes as somewhat underwhelming, the company reached out, saying that what we’ve seen “won’t be the only changes” coming and that the firm is “working on additional improvements to the options trading experience.”
From a strictly business perspective, it will be super-interesting to see how Robinhood balances its growth needs and its apparent desire to bolster user safety. From a more human perspective, we can hope for more action, more quickly.
Still, this is a column about money and private companies, and this private company made a lot more money.