[Click eStock] The Secret Behind Robinhood's $20 Billion Valuation

[Asia Economy Reporter Junho Hwang] "Subscribers are not customers, but products."

The corporate value of Robinhood, a U.S. stock trading platform, has risen to $20 billion. Robinhood's corporate value in September last year was $11.7 billion, ahead of its Nasdaq listing this year. What is the secret behind Robinhood's corporate value nearly doubling in just six months?

Robinhood attracted subscribers by offering commission-free stock trading. Currently, the number of subscribers reaches 13 million. Except for the optional subscription service called 'Robinhood Gold,' which costs $5 per month, Robinhood does not charge subscribers any fees. Instead of charging individual customers, Robinhood sells customers' trading data to high-frequency trading firms such as Citadel and Virtu Financial (PFOF: Payment For Order Flow). These high-frequency traders receive Robinhood's orders, adjust quotes within a short time, place orders, and earn arbitrage profits.

This business model benefits from increasing subscribers and generating more traffic, as revenue grows with higher volume, making zero or low commissions advantageous. Since the pandemic, the number of stock trades by online brokerage firms has surged. As of June 2020, Robinhood's daily stock trading traffic was 4.3 million transactions, more than double the average of existing players like TD Ameritrade, E*TRADE, and Charles Schwab.

Citadel's net trading revenue using customer trading information was $6.7 billion in 2020, a 105% increase compared to 2019. High-frequency traders like Citadel necessarily use PFOF in trading, so online platforms could raise PFOF fees. The average fee per 100 stock/option trade orders increased by more than 20%, from 50.6 cents in January last year to 62.0 cents in December.

Meanwhile, the net PFOF revenue of stock trading platforms like Robinhood steadily increased throughout 2020. Robinhood's PFOF revenue rose about 2.4 times from $91 million in Q1 to $221 million in Q4. Robinhood's PFOF revenue is estimated to account for about 70% of total revenue. Based on last year's PFOF revenue of $687 million, a simple calculation estimates total revenue at $980 million. Considering the corporate value of $11.7 billion, the EV/Sales ratio is 12x, and assuming $20 billion, it reaches 20x.

Google and Facebook, which generate traffic through B2C and utilize it for B2B business, saw their valuations rise from a PSR of 10x at listing to 20x after listing, and the market is reflecting even higher expectations now.

Kim Su-yeon, a market analyst at Hanwha Investment & Securities, said, "Robinhood's revenue structure relies almost entirely on PFOF fees, so it operates a high-margin business," adding, "I think we should pay attention to C2B2B companies that can generate profits by utilizing data in this way."

This content was produced with the assistance of AI translation services.