Let’s face it. As a general rule, retail investors love to hate financial companies. Some, such as LendingClub (NYSE:LC), start out as Wall Street darlings before falling from favor. Others, like structured settlements firm JG Wentworth, create instant enemies by nature of their industry’s bare-knuckle marketing.
And then there’s Robinhood (NASDAQ:HOOD) — the poster child for fallen financial angels. Not only did the firm destroy customer goodwill with its January trading suspensions for high-volume names such as GameStop (NYSE:GME), but they’ve constantly struggled to help enrich retail investors.
In fact, according to data from Thomson Reuters, the average meme stock has fallen 52% from its highs this year. That’s bad news for the retail investors who signed up for the brokerage app in order to trade off of the Reddit hype.
Though Robinhood’s stock has since surprised naysayers with a 75% rise, it’s still a long road to reaching the kind of success that InvestorPlace editors like Louis Navellier look for in picking the next Apple. In the meantime, other fintech firms that have kept themselves out of customer-disappointing drama could do better.
Today, we’ll take a look at some fintech alternatives to Robinhood every investor needs to know.
Fintech: What Goes Around Comes Around
Make no mistake — I’m a fan of well-run fintech companies. Post-2008 banking regulations have turbocharged tech firms, and the best-run among them now dominate the sector.
Rocket Mortgage (NYSE:RKT) now originates more mortgages than Wells Fargo (NYSE:WFC). Meanwhile, non-FDIC firm OneMain Financial (NYSE:OMF) issues more personal installment loans than any other company in America.
Few of these fintech firms, however, have sustained their post-IPO wins. Consider some of the most famous sector IPOs of the past 3 years:
Not exactly a hit parade of Moonshot investments.
That’s because mega-cap fintech firms typically IPO after making their venture capital backers rich. The insiders, in other words, know when to sell out.
Buying a Piece of the Fintech Revolution
So, how can investors find suitable fintech investments?
Consider smaller fintech firms with plenty of momentum.
It’s these firms that could become the next PayPal (NASDAQ:PYPL). Naturally, not all of them will win. But when you’re buying a quality firm for cheap (or at least one in the right business), you’re setting yourself up for more significant gains than buying an overvalued stock like Robinhood and praying it goes up even higher.
You’re going to hear me talk about Cantaloupe (NASDAQ:CTLP) several times over the next month. That’s because this former fraud has finally turned a corner by firing all its senior management (something I’m sure customers would love to see at Robinhood).
Cantaloupe isn’t your typical finance company. Instead, it operates the niche business of vending machine payments systems.
That’s right — I’m talking about the credit card swipers you see on your office’s vending machine. And those cents of commission do add up… to the tune of $160 million per year.
Cantaloupe wasn’t always a shining star. In 2017, the firm was acquired by USA Technologies, a vending machine servicing company that would be delisted from the NASDAQ in February of 2020 for failure to file. In addition, that firm’s chief financial officer and independent auditors would concurrently resign over an ensuing accounting scandal.
It would take a proxy battle to change out remaining management, a process that took nearly three years to finish. But when the dust finally settled, Cantaloupe became a clear-cut stock to watch.
Today, industry veteran Sean Feeney sits at the head of Cantaloupe. The firm looks on track to generate between $1 million and $4 million in EBITDA and could bring in $16 million EBITDA by 2023. The company also has hidden potential — Mr. Feeny is targeting adjacent markets, including electric-car charging stations and Venmo/cryptocurrency payments.
While no turnaround or growth plan can guarantee that Cantaloupe will turn into the next Square (NYSE:SQ), management’s focus on rebuilding the firm’s image is a rarity in the financial services world.
When it comes to Moonshots, I’m almost always a fan of buying the best company in the business.
E-commerce? Amazon (NASDAQ:AMZN).
Online streaming? Netflix (NASDAQ:NFLX).
Ride-hailing? Uber (NYSE:UBER).
But what about the buy-now-pay-later industry dominated by Affirm Holdings (NASDAQ:AFRM) and the recently acquired AfterPay?
There’s an open secret in the banking industry that microloans are a competitive business. (Why do you think banks haven’t moved in more aggressively?) As long as it’s 0% APR, no one seems to care if Klarna or PayPal runs the show. FICO scores are also relatively easy to obtain, reducing much of the competitive advantage that data-rich incumbents might have.
That’s why GreenSky (NASDAQ:GSKY) has a real chance to become the next Moonshot of the buy-now-pay-later world. If managed well, this home improvement loan company could quickly expand into adjacent businesses.
GreenSky is also cheap, making it a tempting buyout target for larger e-commerce and home-improvement firms. Its 2.5x price-to-sales ratio sits at one-eighth of Affirm’s and one-thirtieth of AfterPay’s. In other words, GSKY is a stock that could go 10x on rising multiples alone.
Robinhood: Robbing Paul to Pay Peter?
Is Robinhood a tech firm or a trading platform? That question has dogged Wall Street analysts setting price targets on the newly-listed firm.
But as far as Reddit investors are concerned, it doesn’t matter how analysts classify the brokerage firm. Any price target below HOOD’s $38 IPO price will do, whatever the reasoning may be.
“Ticker shoulda been $ROB,” one Reddit user quipped.
“Sorry but if you touch anything Vlad related you deserve the worst,” wrote another.
Imagine their dismay when, as if by magic, Robinhood’s stock leapt to $80 today. News of Cathie Wood’s investment, plus a slowdown in first-day insider selling, tipped the scales in bullish favor.
So, for those considering HOOD stock, what should you do?
Add HOOD to Cart, Buy Later
Robinhood’s greatest sin was starting as a tech company and failing to continue iterating once it became a brokerage. That’s because scaling a brokerage business involves… well… more customer trading.
Firms such as professional trading platform Interactive Brokers (NASDAQ:IBKR) have the science down to a tee. By targeting “quants” and other high-frequency traders, IB can charge ultra-low commissions while still generating an average of $2,265 in annual revenue from each of its 1 million clients. Less hyperactive firms like Charles Schwab (NYSE:SCHW) generate about $254 in yearly revenue from each customer.
Meanwhile, the average Robinhood account generated just $137 in annualized revenue during Q1’s trading bonanza.
Why the big discrepancy?
First, the average Robinhood account has less than $5,000, versus $250,000 for Interactive Brokers. Second, the app-based brokerage only allows discretionary (i.e., point-and-tap) trades, while IB’s algorithmic trading generates an average of 600 transactions per account annually.
In other words, if Robinhood were valued as a brokerage firm, HOOD is worth 40-50% of IB’s value — or $14 per share — if one assumes 20% growth for five years. Its value rises to $31 with a more aggressive 50% growth target.
But what if HOOD became a tech firm? In that case, a surging Robinhood has its choice of becoming a payment gateway, cryptocurrency exchange, online money manager or all of the above. If Cathie Wood has it her way, Robinhood could become the next PayPal, worth $320 billion 20 years from now. And at an 8% discount rate, that gives HOOD a fair value of $81 today.
But will Robinhood live up to those lofty expectations? Without management change (and certain insiders cashing out their stake), it’s hard to imagine CEO Vlad Tenev doing it alone.
Despite the long-run potential, investors should wait for the $30s before jumping into HOOD.
The Bulls and the Bears of Robinhood
|100%||The amount of personally-owned shares Robinhood’s chief marketing officer sold in HOOD’s first day of trading.|
|4.9 million||Shares of HOOD bought by Cathie Wood’s ARKK Fund the same day.|
|$151.20||The highest Wall Street price target on Robinhood stock, courtesy of Elazar Advisors.|
|$47||InvestorPlace Market Analyst Joanna Makris’s price target for HOOD. Robinhood has one of the highest price target spreads of any major fintech firm.|
Electric Vehicles and Cryptocurrency
If you believe that history rhymes, Dana Blankenhorn’s analysis of Lucid stock (NASDAQ:LCID) is an eye-opening look into what can happen to high-fliers like Robinhood.
Joanna Makris sits down (virtually) with Charge Enterprises (OTCMKTS:CRGE) CEO Andrew Fox for a Q&A about his micromobility company. OTC investors will want to take a look.
In other news, Ethereum (CCC:ETH-USD) will undergo one of its most significant hard forks tomorrow. Brenden Rearick discusses what you need to know.
And on the subject of cryptocurrencies… Mark Hake writes about why Cardano (CCC:ADA-USD) will become one of the “big-3” cryptos due to its smart contract capabilities.
Will the Real Vlad Tenev Please Stand Up?
There are firms out there that retail investors want to see succeed:
- Nostalgia value — GameStop, BlackBerry (NYSE:BB)
- Star power — AMC Entertainment (NYSE:AMC), Tesla (NASDAQ:TSLA)
- Great product/service — Nvidia (NASDAQ:NVDA), Newegg (NASDAQ:NEGG)
But what about companies that seem to profit at the expense of customers? In other words, will Robinhood CEO Vlad Tenev succeed in winning back fans?
Some point to the importance of demeanor. Bank bosses from the charismatic (JP Morgan’s (NYSE:JPM) Jamie Dimon) to the avuncular (First Republic’s (NYSE:FRC) James Herbert) have similarly succeeded in steering their companies to industry-beating profits.
But star power isn’t everything. After all, the same respective characteristics in SoftBank’s (OTCMKTS:SFTBY) Masayoshi Son led to just the opposite outcome. And when you’re digging yourself out of a PR hole, it helps to have a trusted operator at the helm.
Today, Robinhood’s fair value likely sits in the $30-50 range. So, if Robinhood truly cares for its investors, it would find a star COO — the kind of role that Google’s (NASDAQ:GOOG, NASDAQ:GOOGL) Eric Schmidt and Facebook’s (NASDAQ:FB) Sheryl Sandberg once filled — and let that person shine. Only then that HOOD *may* become a potential 10-bagger to watch.
Have a question or comment? Connect with Tom on LinkedIn or email him at email@example.com.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.