After a lengthy period of experimentation, investors have decided that consumer fintech trading businesses are not SaaS companies, meaning that those fintech revenues should not be valued as if they were annual recurring revenue (ARR), the main product of software-as-a-service concerns.
The point matters because a host of consumer fintech startups have raised capital, spent and been valued in recent years as if they are SaaS companies. This may have been an error.
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The fact that consumer fintech revenues will not be valued like SaaS top line was made clear this week with Robinhood announcing layoffs ahead of earnings after seeing its public-market value collapse and Coinbase trading at or near record lows — the U.S. cryptocurrency trading platform has lost more than 65% of its peak value as of today, despite rather robust profitability.
Both companies were once worth a multiple of their present value, and each saw their shares trade hands before going public at higher prices than they today enjoy. So what happened? Politely, optimism. Less politely? A little greed. Let’s talk about it.
Trading incomes are good, but not great
Robinhood is a neat idea for a business. Thanks to payment for order flow (PFOF), Robinhood realized it could offer zero-cost consumer trading and still generate big incomes for itself. This was akin to finding an exploit in a video game, only the game was the stock market and the exploit was a possibly temporary setup in which selling consumer order flow is legal and palatable.
As the COVID-era savings and investing boom took flight, Robinhood saw its user base and trading volume — and, therefore, trading revenues — soar. The unicorn got into trouble when its tech, accounts or both got pounded into the ground during the memestock cycle, but, generally speaking, Robinhood grew until its IPO and posted some early adjusted profits.
Coinbase picked up related tailwinds during COVID, riding the boom in global demand for crypto assets. Thanks to a market that will yet bear trading fees, Coinbase made a mint as individuals and institutions alike got busy buying and selling digital assets.
Investors, looking at the two companies while they were still private, saw rising consumer demand, regular revenues per user and fat margins. Software companies are inherently attractive businesses thanks to their high gross margins, and with users busy making trades, I suspect that founders and investors in the two companies were content to value them more like SaaS companies — where revenue is often contracted and tends to expand over time as customer use continues.
While Coinbase and Robinhood were posting top-line expansion, it was hard to quibble with their valuations. Then, the market changed, and suddenly we’re expecting Robinhood to shrink compared to its year-ago results. And if I am reading Coinbase’s Q1 2021 results and Q1 2022 estimates (via Yahoo Finance), the crypto exchange could also report negative year-over-year growth shortly.
Once the growth story was reduced or eliminated, the companies were laid bare as what they really were: Financial products whose growth will depend on macroeconomic factors and are seeing rising competition from a number of competitors both large and small.
Coinbase, now worth around $33 billion, is still a very valuable company. But did anyone investing in it as a private company think that it would eventually be worth 3.69x its trailing revenues? That’s where it’s sitting today, per Yahoo Finance data (YCharts has the number at 3.85x). Robinhood, also looking at Yahoo Finance data, is trading at 2.78x its trailing revenues (4.2x per YCharts). Those are yucky numbers, but negative growth doesn’t an investor excite.
Who is holding the bag from the repricing of the two companies? Given their somewhat brilliant IPO timeline, public-market investors, I think.
Consumer fintech trading revenues were never SaaS revenues. They are not durable in the same way (recurring), nor do they tend to expand over time on a per-account basis (net retention). Those elements, along with high gross margins that most digital service sales engender, are what make SaaS revenue so valuable. It effectively never shrinks. Consumer fintech trading revenues, however, can.
The last two years were periods of greed, when investors of all stripes valued things as if they were the thing that buyers of their stock wanted them to be, and not what they really were. Now that the period of mania has faded, those errors are more obvious. Many things want to be considered SaaS, and few are. There will be other examples.
More after we get Robinhood earnings tomorrow and Coinbase shortly after.
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