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Publicly traded Fintech companies to watch in 2022 and beyond | Investing
The last couple of years were extremely productive in terms of FinTech companies going public: Root (October, 2020), Upstart (December, 2020), Affirm (January, 2021), Coinbase (April, 2021), Marqeta (June, 2021), Robinhood (July, 2021) and Nubank (December, 2021) are just the most notable ones, while the list is much longer. The services that these, now public, companies offer range from insurance, to consumer lending, to payments, to investments, to software and cover pretty much every surface of the FinTech attack on legacy financial players.
I have identified around 20 publicly traded Fintech companies across multiple segments (Payments, Consumer lending, Infrastructure, and Investing) and will follow their journey in this newsletter: will describe what they do, break down how they make (or plan to make) money, as well as report on their progress after quarterly earnings calls and other major milestones.
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This is the fourth part of the series “Publicly traded FinTech companies to watch in 2022 and beyond”. The first part of the series focused on the payments space and covered such companies as Paypal, Block (formerly known as Square), and Affirm. The second part of the series focused on consumer lenders Upstart, SoFi, and LendingClub. The third part of the series focused on companies providing infrastructure for other Fintechs and established financial institutions and covered such companies as Marqeta, Blend and Paymentus.
This time I wanted to write about publicly traded Fintech companies attempting to change the way people invest and build wealth: Robinhood, Coinbase and XP Inc.
Robinhood | NASDAQ: HOOD 0.00%↑
Market Cap: $9.5B | 1Y share price change: -67.3% (went public on July 29, 2021)
Net Revenue (2021): $1.8B | Net Revenue Growth (YoY): +89%
Active Customers (Q4 2021): 17.3M | Customer Assets (Q4 2021): $98B
Profile: Robinhood: a brokerage that aimed to "democratize finance for all"
Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt with the goal of “democratizing finance for all” and went public July 28, 2021. The company is known for offering commission-free trading of stocks, options, ETFs and, as of lately, cryptocurrencies via its user-friendly and nicely-designed mobile app. The company was a major beneficiary of the pandemic and the subsequent increase in the retail investors participation in the stock market. Thus, the company grew its customer base (as measured by funded accounts) from 5.1 million at the end of 2019 to 22.7 million at the end of 2021.
However, as the stock market turned around on the concerns of the rising interest rates, Robinhood’s growth prospects came under question. Thus, the growth in the number of funded accounts was almost flat over the last two quarters (growing from 22.5 million accounts at the end of Q2, 2021 to 22.7 million at the end of Q4, 2021), and the number of Monthly Active Users has been on a steady decline (decreasing from 21.3 million MAU in Q2, 2021 to 17.3 million MAU in Q4, 2021). Moreover, the company delivered negative Adjusted EBITDA in both Q3 and Q4, 2021, as the revenue declined on lower customer activity.
Robinhood lost 67% of its market capitalization since the IPO, and, naturally, the company is getting lots of criticism lately. However, there are two bullish investment theses for the company. The first thesis is built around “baby boomers” retiring and passing their wealth to the younger generations. Thus, McKinsey & Co estimates that financial assets held by Gen X and Millennials will increase by $36.8 trillion during the period of 2020-2030. The bullish thesis builds on the assumption that Robinhood will be a major beneficiary of this wealth transfer given the demographics of its customers base. Robinhood is actively preparing for this process by launching functionality to transfer stocks to Robinhood accounts, as well as preparing to roll out retirement accounts.
The second thesis is built around Robinhood improving monetization of its highly engaged customer base through supplementary financial services. Thus, cryptocurrency trading generated almost 20% of the company’s revenues in Q4, 2021, and Robinhood continues investing in this space by rolling out its Crypto Wallet. The company has also launched Robinhood Cash Card, a debit card that allows collecting bonuses on eligible purchases, as well as automatically investing round-ups. In its latest quarterly earnings call, the company’s management voiced the ambition to “create an ecosystem of financial services and products” covering such areas as investing, spending and saving, as well as payments.
Things to watch in 2022:
Assets Under Custody. As the growth in the number of funded accounts has slowed down, and the active monthly user base is on the decline, a more relevant metric to watch would probably be Assets Under Custody. Robinhood potential is questioned due to their focus on younger customers (who, allegedly, don’t not have much to invest). Rapid AUC growth would support the investment thesis of wealth transfer from baby boomers to their kids.
Diversification of Revenue. Improved crypto offering and Cash Card are expected to help Robinhood diversify its revenue stream with non-trading income. I am especially interested if Robinhood will succeed in the roll out of the Cash Card, as this product would provide revenue that is not directly impacted by the direction of the stock market or cryptocurrency prices.
International expansion. During the latest earnings call the company voiced the ambition to expand internationally. Most likely this expansion, at least in the beginning, will include crypto offering. The company holds the a required license to offer cryptocurrency trading in the UK, which makes this market the likely start for Robinhood’s international ambitions.
Coinbase | NASDAQ: COIN 0.00%↑
Market Cap: $38.6B | 1Y share price change: -55.1% (went public on April 14, 2021)
Net Revenue (2021): $5.9B | Net Revenue Growth (YoY): +544%
Active Clients (Q4 2021): 11.4M | Customer Assets (Q4 2021): $278B
Profile: Coinbase: selling shovels in a gold rush is a profitable business
Coinbase was founded in 2012 by Brian Armstrong and Fred Ehrsam and went public on April 14, 2021. Coinbase is one of the largest cryptocurrency exchanges in the world, and a leader in the United States. Similarly to Robinhood, the company went through rapid growth during the pandemic, which triggered multiple boom cycles in cryptocurrency trading. Thus, the company grew its Monthly Transacting User base from 1.3 million in Q1, 2020 to 11.4 million in Q4, 2021. The company’s revenue followed and grew from $179 million in Q1, 2020 to $2.5 billion in Q4, 2021.
Opposite to Robinhood, the company continued to grow rapidly through 2021 despite the pandemic fading out (i.e. Assets on the Platform grew from $90 billion at the end of 2020, to $278 billion at the end of 2021). Moreover, the company is profitable and generated $3.6 billion in Net Income on the Revenue of $7.4 billion in 2021 (delivering 48% Net Income Margin!). The company grew across multiple dimensions: Coinbase grew its customer base, it expanded internationally (now accepting customers in 90+ countries), increased institutional customer base, multiplied subscription revenue, and the list goes on.
If you follow the company, then you might get a feeling that it is just unstoppable and manages to tap into every area of innovation in the crypto and Web3 space. For example, in addition to its current offering that includes an exchange, a crypto wallet and a crypto-based payment card, the company is working on the launch of an NFT (non-fungible token) marketplace, and even announced plans to produce a movie based on Bored Ape Yacht Club NFT collection. Moreover, through its venture arm, Coinbase Ventures, the company made investments in over 200 companies in crypto/Web3 industry.
The critics say that the company is facing increasing competition both internationally and at home from such companies as Binance, Crypto.com, Kraken, FTX and Robinhood. Increasing competition might not only lead to the loss of market share for the company, but put a pressure on its fees, which are notoriously higher than of their peers. In addition, the most bearish investors are still questioning the viability of cryptocurrencies. After all, investor interest in cryptocurrencies (and thus, services of Coinbase) was closely linked to the surge in prices.
Things to watch in 2022:
New product launches. Coinbase guided for $4.25-5.25 billion spend in Technology & Development and General & Administrative expenses in 2022. The company “plans to hire 6,000 employees in 2022…to execute on product innovation, international expansion, platform scaling and reliability”. That is a lot of money and a lot of people, so expect a lot of new product launches and experimentations.
International expansion. As mentioned above, Coinbase is available for customers in over 90 countries. However, it is yet to prove it can successfully compete outside of the United States. It has a lot of financial and human resources to put up the fight about smaller local players, but will it be able to win customers away from Binance, Kraken and FTX is still a question.
Evolution of Web3 industry. Every year brings a new wave of innovation in the crypto space. Decentralized Finance, NFTs, Play-to-Earn games….It feels that the regulatory concerns did not allow Coinbase to be the front-runner in the space and thus, it now has to play the catch up game (for instance, its upcoming NFT marketplace will have to compete with Opensea). It will be interesting to see the next hottest thing in crypto/Web3 space and if Coinbase might lead it this time.
Acquisitions. Coinbase ended last year with over $7 billion in cash and cash equivalents, and, given a highly profitable business, will keep printing more of it in 2022. I’d guess they might put that to work to expedite the growth, especially, internationally.
XP Inc. | NASDAQ: XP 0.00%↑
Market Cap: $15.8B | 1Y share price change: -28.1%
Revenue (TTM*): $3.3B | Net Revenue Growth (YoY): +36%
Active Customers (Q4 2021): 3.4M | Customer Assets (Q4 2021): $173.3B
XP Inc was founded in 2001 by Guilherme Benchimol and Marcelo Maisonnave and went public on December 11, 2019. XP Inc position themselves as “a leading, technology-driven platform and a trusted provider of low-fee financial products and services in Brazil”. The company’s platform provides low-commission trading in equities, fixed-income, investment funds, and other investment products. You can think of it as a Charles Schwab of Brazil, as the company is offering a wide range of investment services ranging from trading, to advisory, to securities placements for corporations.
During the last two years since the company went public, the number of active customers grew from 1.7 million (Q4 2019) to 3.4 million (Q4 2021), and Assets Under Custody grew from R$409 billion (approximately $87 billion) to R$815 billion (approximately $173 billion at the current exchange rate). The company is also highly profitable and earned R$3.6 billion ($0.76 billion) in Net Income on the Total Revenue of R$12.1 billion ($2.57 billion) in 2021 (which represents a 30% Net Income margin). The company is also developing auxiliary products to increase monetization of its customer base. Thus, the company offers insurance brokerage, pension funds, as well as credit and credit cards.
An interesting twist in the story of XP Inc, is that it first attempted to go public in 2017. However, IPO plans were shelved as Itaú Unibanco Holding SA, Brazil’s largest bank, paid R$6.3 billion (approximately $2 billion at the time) for a 49.9% stake in the company. Itaú’s plans to take the full control of the company were blocked by the regulators, and XP Inc remained an independent player. The bank remains a shareholder in the company, but has divested large portion of its stake in the company (by merging XPart S.A. into XP Inc, which essentially completed the transfer of bank’s stake in XP Inc directly to its shareholders), and plans to eventually fully exit the company.
If you follow the Fintech industry, you have probably heard of Nubank, the world’s largest neobank going public last year. In 2020, Nubank, a neobank that has over 50 million customers in Brazil, acquired XP Inc.’s competitor, Easynvest. At the time of the acquisition, Easynvest reported 1.5 million customers, and by the time of Nubank’s IPO in December 2021, this number grew to 2.8 million (as per the SEC filing). It is very exciting to see these two companies competing and together developing the market in Brazil.
Things to watch in 2022:
Push into banking services. As mentioned above, XP Inc. is deversifying its revenue stream with new services, such as pension funds, loans and credit cards. I believe they are a number of years ahead of some of the US brokerages and neobanks (think of Robinhood), and thus, their results could provide insights if this upsell model actually works.
Acquisition of Banco Modal. In January, 2022, XP Inc announced the acquisition of Banco Modal, an investment bank, that similarly to XP, branched out to consumer banking products through its modalmais brand. The deal, if approved, would extend XP’s customer base and product range, but more importantly, would strengthen XP’s push into banking.
Competition with Nubank. XP’s profitability wasn’t left unnoticed (remember 30% Net Income margin?), and naturally attracted competition. However, I’d expect that competition with Nubank, which now has a pile of cash sitting on the balance sheet from the IPO, will be much harder than competition with local startups. Let’s see how XP fairs again Nubank going forward.
Robinhood will kick off the Q1 2022 earnings season and will report their results on April 28, 2022 after market close. Coinbase and XP Inc are expected to hold their earnings calls in May, 2022. Stay tuned!
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Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.