Better Fintech Stocks: Robinhood Vs. Confirm

Robin Hood (HOOD -0.30%) and Confirm (AFRM 4.51%) were both once considered disruptive fintech companies. Robinhood attracted millions of retail investors with its commission-free trades for stocks, options and cryptocurrencies, while Affirm challenged credit card companies with its buy-now-pay-later (BNPL) services, which split up larger purchases.

Robinhood’s stock closed at a record high of $70.39 in August 2021, but is now trading at around $10. Likewise, Affirm’s stock hit an all-time high of $168.52 in November 2021, but it’s only worth about $12 today. Both stocks collapsed as obvious weaknesses emerged.

Image source: Getty Images.

Robinhood’s growth stalled when the meme stock craze, fueled largely by stimulus checks and social media hype, came to an abrupt end. Rising interest rates also drove investors away from the riskier alternatives and cryptocurrencies that had fueled Robinhood’s growth. Affirm struggled as more companies launched their own BNPL services, inflation dampened consumer spending, and crime rates soared higher. Should investors buy some of these falling stocks as a turnaround?

What happened to Robinhood?

Robinhood subsidizes its commission-free trades by selling clients’ orders to high-frequency trading firms, which profit from the bid-ask spread for each order. This “pay for order flow” business model has been scrutinized by the Securities and Exchange Commission (SEC), but the agency does not plan to ban the practice anytime soon.

Robinhood’s revenue surged 89% to $1.82 billion in 2021 amid a buying frenzy in growth stocks, meme stocks and cryptocurrencies. But in 2022, revenue fell 25% to $1.36 billion as those orders fell through.

The platform’s monthly active users (MAUs) peaked at 18.9 million in the third quarter of 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) fell from $95 billion to $62 billion. This means that the average size of each Robinhood account (which is calculated by dividing the AUC of its funded accounts) fell from $4,259 to $2,696.

As Robinhood’s growth cooled, profits crumbled. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell 78% to $34 million in 2021, then fell to a loss of $94 million in 2022. But this year, analysts expect revenue to rise 34% to 1.8 billion dollars, with a positive adjusted EBITDA of 421 million dollars. We should take these estimates with a grain of salt, but the outlook could brighten as the market warms up again and costs continue to be cut.

What happened to Affirm?

Affirm divides individual purchases into smaller installments by approving “microloans” for individual customers. That makes it an attractive option for younger, lower-income customers who can’t be approved for traditional credit cards, as well as a cheaper alternative to credit card fees for merchants.

In fiscal 2022, which ended last June, Affirm’s revenue grew 55% to $1.3 billion, its number of active customers increased 96% to 14 million, and it locked in new partners that Amazon, Goaland American Airlines. That expansion reduced Affirm’s overall reliance on the struggling connected fitness equipment maker Platoonwho was once the top customer.

But in the first half of fiscal 2023, Affirm’s revenue rose just 21% year over year to $630 million as macro and competitive headwinds intensified. Active customers grew 39% to 15.6 million, transactions per customer improved and 30-day delinquencies held steady at less than 3%, but it only expects revenue to grow between 13% and 19% for the full year.

That decline wouldn’t be too worrisome if Affirm were profitable. But the net loss widened from $441 million in fiscal 2021 to $707 million in fiscal 2022, and analysts expect an even bigger loss of $1.1 billion in fiscal 2023. The red ink indicates that Affirm will have to raise its merchant fees to break even . then could drive these clients towards other BNPL services like PayPal’s Pay in 4 or Block‘s AfterPay — both of which are loss-leading extensions of more diversified fintech ecosystems.

The obvious winner: Robinhood

Robinhood trades at five times this year’s sales, while Affirm trades at roughly two times its fiscal 2023 sales. Robinhood may seem more expensive, but it’s arguably a better bet than Affirm because it has a clearer chance of a comeback.

Robinhood remains dangerously dependent on smaller and fickle retail investors who like to trade volatile cryptocurrencies and options (which accounted for 88% of transaction revenue last quarter), but growth could quickly accelerate once the bear market ends. I can’t make the same call to Affirm, which still hasn’t proven its business model is sustainable.