Robinhood (HOOD 4.44%) and Affirm (AFRM 5.31%) 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 an all-time high of $70.39 in Aug. 2021, but it now trades at about $10. Likewise, Affirm's stock hit its record high of $168.52 in Nov. 2021, but it's only worth about $12 today. Both stocks collapsed as glaring weaknesses appeared.
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Robinhood's growth stalled out when the meme stock mania, which was largely driven by stimulus checks and social media hype, abruptly ended. Rising interest rates also drove investors away from the riskier options and cryptocurrencies that had fed Robinhood's growth. Affirm struggled as more companies launched their own BNPL services, inflation curbed consumer spending, and its delinquency rates ticked higher. Should investors buy either of these fallen stocks as a turnaround play?
What happened to Robinhood?
Robinhood subsidizes its commission-free trades by selling its clients' orders to high-frequency trading firms, which profit from the bid-ask spread of each order. This "payment for order flow" business model has been scrutinized by the Securities and Exchange Commision (SEC), but the agency doesn't plan to ban the practice anytime soon.
Robinhood's revenue rose 89% to $1.82 billion in 2021 during the buying frenzy in growth stocks, meme stocks, and cryptocurrencies. But in 2022, its revenue dropped 25% to $1.36 billion as those orders dried up.
The platform's monthly active users (MAUs) peaked at 18.9 million in the third quarter of 2021, but dropped to just 11.4 million by the end of 2022. During that period, its number of net cumulative accounts edged higher from 22.4 million to 23.0 million, but its total assets under custody (AUC) plummeted from $95 billion to $62 billion. This implies the average size of each Robinhood account (which is calculated by dividing its AUC by its funded accounts) dropped from $4,259 to $2,696.
As Robinhood's growth cooled off, its profits crumbled. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 78% to $34 million in 2021, then dipped to a loss of $94 million in 2022. But this year analysts expect its revenue to rise 34% to $1.8 billion, with a positive adjusted EBITDA of $421 million. We should take those estimates with a grain of salt, but its prospects could brighten as the market warms up again and it continues to cut costs.
What happened to Affirm?
Affirm breaks up single purchases into smaller installments by approving "microloans" for individual customers. That makes it an appealing option for younger, lower-income shoppers who can't get approved for traditional credit cards, as well as a cheaper alternative to credit card swipe fees for merchants.
In fiscal 2022, which ended last June, Affirm's revenue rose 55% to $1.3 billion, its number of active customers surged 96% to 14 million, and it locked in new partners like Amazon, Target, and American Airlines. That expansion reduced Affirm's overall dependence on the struggling connected fitness device maker Peloton, which was once its top customer.
But in the first half of fiscal 2023, Affirm's revenue only rose 21% year over year to $630 million as the macro and competitive headwinds intensified. Its active customers grew 39% to 15.6 million, its transactions per customer improved, and its 30-day delinquencies held steady at under 3%, but it only expects its revenue to rise between 13% and 19% for the full year.
That slowdown wouldn't be too worrisome if Affirm were profitable. But its net loss widened from $441 million in fiscal 2021 to $707 million in fiscal 2022, and analysts expect an even wider loss of $1.1 billion in fiscal 2023. That red ink indicates that Affirm needs to raise its merchant fees to break even, but doing so could drive those clients toward other BNPL services like PayPal's Pay in 4 or Block's AfterPay -- which are both loss-leading extensions more diversified fintech ecosystems.
The obvious winner: Robinhood
Robinhood trades at five times this year's sales, while Affirm trades at about two times its fiscal 2023 sales. Robinhood might seem pricier, but it's arguably a better bet than Affirm because it has a clearer shot at a comeback.
Robinhood is still dangerously dependent on smaller and fickle retail investors who like to trade volatile cryptocurrencies and options (which accounted for 88% of its transaction revenues last quarter), but its growth could quickly accelerate once the bear market ends. I can't make that same call for Affirm, which still hasn't proven that its business model is sustainable.
