Better Fintech Stocks: Robinhood Markets Vs. Coinbase Global

Robinhood Markets (HOOD -2.04%) and Coinbase Global (COIN -3.15%) both disappointed many investors in the past year. Robinhood’s stock closed at a record high of $70.39 last August, but it now trades at just over $10 a share. Coinbase’s stock hit an all-time high of $357.39 last November, but shares are now worth less than $60.

Both stocks crashed for similar reasons. Their trading platforms initially attracted legions of investors during the buying spree in growth stocks, meme stocks and cryptocurrencies throughout 2021, but lost their luster as rising interest rates crushed these speculative investments. But could one of these broken fintech stocks make a comeback in the coming quarters? Let’s take another look at their business models, near-term challenges and valuations to decide.

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Robinhood is hungry for active traders

Robinhood popularized commission-free trading for stocks, options and cryptocurrencies. It achieved this by selling its clients’ orders to high-frequency trading firms, which profit from the bid-ask spread for each order. The “pay for order flow” business model was closely scrutinized by the Securities and Exchange Commission (SEC) over the past year, but the agency recently decided to ban the practice entirely.

Robinhood’s monthly active users (MAU) peaked at 18.9 million in Q3 2021, but that fell to just 12.2 million in Q3 2022. The number of net cumulative funded accounts still rose from 22.4 million to 22.9 million during this period, but its total assets under custody (AUC) plunged from $95.4 billion to $64.6 billion. This means that the average size of each Robinhood account fell from $4,259 to $2,821. That decline can be attributed to the lack of new stimulus checks, the end of meme stock mania and the market’s waning interest in cryptocurrencies.

Robinhood’s revenue rose 89% to $1.82 billion in 2021, but then fell 33% year over year to $978 million in the first nine months of 2022. Its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) fell by 348% to 348%. million in 2021, then slumped to a loss of $176 million in the first nine months of 2022, even as it implemented aggressive cost-cutting measures to cushion the blow of falling revenues. Analysts expect the online brokerage’s revenue to fall 24% to $1.37 billion for the full year, with an adjusted EBITDA loss of $91 million.

Coinbase is preparing for a crypto winter

As one of the largest cryptocurrency exchanges in the world, Coinbase generates most of its revenue by charging transaction fees to crypto trades. Therefore, Coinbase is much more of a “pure play” in the crypto market than Robinhood, which generated only 14% of its total revenue from cryptocurrency transactions in the last quarter.

That’s why many investors apparently lost hope in Coinbase after CEO Brian Armstrong told investors to prepare for another “crypto winter” in June. The severe downturn in the cryptocurrency market – driven in large part by rising interest rates, the flight from riskier assets, regulatory headwinds and the implosions of several high-profile tokens – saw Coinbase’s average monthly transaction users (MTUs) fall from a peak of 11.4 million in the fourth quarter of 2021 to just 8.5 million in the third quarter of 2022. Between those two quarters, quarterly trading volume fell by 71% as total assets on the platform shrank 64% to $101 billion.

In 2021, Coinbase’s revenue rose 545% to $7.36 billion as adjusted EBITDA increased 676% to $4.09 billion. But in the first nine months of 2022, revenue fell 48% year over year to $2.54 billion and adjusted EBITDA fell to a loss of $247 million — even after it laid off nearly a fifth of its workforce earlier this year. Analysts expect revenue to fall 59% to $3.2 billion this year, with an adjusted EBITDA loss of $424 million.

Which fintech stock has a better chance of a comeback?

Robinhood and Coinbase both face brutal headwinds in the near term, but Robinhood’s more diverse mix of options, stocks and cryptocurrencies should partially insulate it from the crypto winter that threatens to completely freeze Coinbase’s core business. That said, Robinhood still faces stiff competition from other online brokers, which also offer commission-free trades, while the ongoing bear market may prevent investors from increasing their investments.

Both stocks were crushed over the past year, but neither is trading at a bargain-bin value just yet. Based on their current enterprise values, Coinbase and Robinhood are trading at 3.5 and 4.6 times this year’s sales, respectively. They can both seem cheaper than a traditional brokerage Charles Schwab (SCHW 0.76%)which trades at 7 times this year’s sales, but Schwab is also solidly profitable and generates more stable income growth.

I wouldn’t rush to buy any of these fintech stocks right now. But if I had to choose one over the other, I would definitely choose Robinhood over Coinbase. Coinbase may eventually benefit from the long-term recovery of the crypto market, but I’d rather just buy a top cryptocurrency to capitalize on that turnaround rather than bet on an entire crypto exchange.