Robin Hood (NASDAQ: HOOD) and To affirm (NASDAQ: AFRM) are both high growth fintech companies that aspire to disrupt traditional financial institutions. Robinhood’s introduction of commission-free stock and cryptocurrency trading has attracted a new generation of retail investors and forced traditional brokerage houses to eliminate their fees. Affirm challenges credit card companies with a BNPL (buy now, pay later) payment network that splits larger purchases into smaller monthly payments.
Both stocks are volatile. Robinhood went public at $ 38 a share in July, jumped to $ 85 in August, then fell back to around $ 40 as investors worried about its regulatory challenges. Affirm went public in January at $ 49 per share. It climbed to $ 146.50 the following month, reverted to its IPO price in May, and jumped to around $ 110 after revealing a new partnership with Amazon (NASDAQ: AMZN).
Should investors consider buying either of these fintech stocks? Let’s take a fresh look at the two companies, their growth rates and valuations to find out.
Both companies target young users
Robinhood and Affirm both target younger users who are less likely to be blocked by traditional brokerage houses and credit card companies, respectively. In its IPO filing, Robinhood revealed that 70% of its assets in custody were from users between the ages of 18 and 40, with a median age of 31. Affirm’s IPO file revealed that 48% of its clients were Millennials.
Robinhood subsidizes its free stock trading by selling its orders to market makers such as High Frequency Trading Companies (HFTs), who profit from the bid-ask spread of each order. This “payment for order flow” (PFOF) model is controversial: Critics claim it prevents investors from getting the best price, while proponents argue that HFT companies can get better prices with online orders. bigger than the smaller direct orders from the public exchanges – so it’s actually a “win-win-win” deal for the investor, Robinhood, and the HFT company.
Affirm works with retailers who don’t want to pay credit card companies a 1% to 3% “sweep fee” for every purchase. Its BNPL services also operate faster than the sluggish automated clearing houses (ACH) that large retailers use for their private label payment cards. Affirm provides both interest-free and interest-free payments (depending on the retailer’s preference), it charges no additional fees, and its mobile app allows consumers to track their payments and locate other retailers accepting Affirm.
Both companies are growing rapidly
Robinhood’s revenue jumped 245% to $ 959 million in 2020, while its monthly active user count (MAU) jumped 172% to 11.7 million. In the first half of 2021, Robinhood’s revenue grew 193% year-on-year to $ 1.09 billion, while its MAUs grew 109% to 21.3 million.
This meteoric growth, which has been in part fueled by the growing interest in “memes stocks” and cryptocurrencies among retail investors, puts it at a striking distance from leading traditional brokerage houses like Charles Schwab, which hosts 32.4 million active brokerage accounts.
Affirm’s revenue increased 71% to $ 262 million in fiscal 2020, which ended June 30, while its number of active customers nearly doubled to 7.1 million. Its number of active merchants jumped 412% year-on-year to nearly 29,000, in part thanks to a new partnership with Shopify which enabled small traders to provide BNPL services.
Affirm’s new partnership with Amazon, which will gradually integrate its BNPL services over the coming months, could attach even more merchants and buyers to its expanding ecosystem.
For the current fiscal year, analysts expect Robinhood’s revenue to grow by 108% and Affirm’s by 34%. Based on these estimates, Robinhood is trading at 17 times this year’s sales, while Affirm is trading at 25 times this year’s sales. Neither company is profitable yet.
Both companies face short-term challenges
Robinhood appears cheaper than Affirm, but it faces significant short-term challenges, including pressure from lawmakers and regulators to ban the PFOF brokerage model in the United States.
An outright ban could cripple Robinhood, but I think that’s highly unlikely since most traditional brokerage houses – including Schwab and its subsidiary TD Ameritrade – also use PFOF to subsidize free trading.
Investors are prepared to pay a higher premium for Affirm thanks to its recent deal with Amazon, but it’s too early to say whether the partnership will significantly increase revenue this year. Amazon’s BNPL deployment could be slower than expected, or it could still team up with Affirm’s competitors in other markets.
Affirm also suffers from customer focus issues. His first client, platoon, faces difficult post-pandemic comparisons and a growing number of cheaper competitors.
The winner: Robinhood
I expect both stocks to remain volatile for the rest of the year, but I think Robinhood is a better buy than Affirm right now, for three reasons.
First, Robinhood faces fewer direct competitors than Affirm, which still faces Square and Pay Palthe continued expansion of the BNPL market. Second, Robinhood is growing faster than Affirm, but its stock is significantly cheaper.
Finally, I believe Robinhood will overcome regulatory challenges in the short term and overcome its challenges of growing as a public company. When that happens, its action could again be valued much more.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.