Robinhood Stock’s advantage over Coinbase in a crypto winter

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Robinhood shares have fallen nearly 30% over the past year. Justin Sullivan/Getty Images

Robinhood Markets and Coinbase Global have had to weather a storm over the past year, with precipitous declines in asset prices discouraging retail investors that both brokers consider essential to their client base.

But Robinhood (ticker: HOOD) has things that Coinbase (COIN) does not have that are likely to help the stock, according to Mizuho Securities.

Coinbase, which focuses on digital assets, has been chilled to the bone by the crypto winter, telegraphing the market what could be a $500 million loss for 2022. While Bitcoin and other cryptocurrencies lost about two-thirds of their value last year, retail investors attracted by the previous bull market were spooked. For brokers like Coinbase and Robinhood, fewer transactions mean less revenue.

Robinhood is expected to report a slight decline in crypto trading volumes during the fourth quarter, according to analysts led by Dan Dolev at Mizuho Securities. On Wednesday, the company lowered its estimate of quarterly Robinhoods crypto-related revenue from $6 million to $40 million.

Both companies are expanding into other areas. Coinbase is offering investors opportunities to earn yield on their crypto holdings, and Robinhood will launch a retirement product.

But the main activity of both brokers is trading. While Coinbase is coin-focused, Robinhood not only acts as a crypto trading platform, it is also a major venue for retail investors to buy and sell stocks and options. This should help him perform better to close out 2022 than Mizuho once thought.

Our detailed analysis of Robinhoods revenue streams shows a modest advantage over our previous Q4 2022 estimates, the Dolevs team said. We expect the upside to come from better-than-expected options trading volumes coupled with higher net interest income, somewhat offset by lower crypto trading volumes.

Indeed, while it appears crypto trading volumes tumbled towards the end of last year and stock trading was reduced, options volumes improved significantly in the fourth quarter through December, according to Mizuho. Analysts raised their revenue estimate for this segment from $12 million for the fourth quarter to $127 million, more than 10% higher than previous forecasts.

Net interest income also helped. Mizuho raised its sales estimate in this segment by $7 million, or 5%, for the fourth quarter, citing the Federal Reserve’s decisions to raise interest rates, the adoption of cash transfer accounts Robinhoods and management perspectives. Higher interest rates mean Robinhood profits more from loans, and the group also earns a commission when customers choose to have their uninvested money transferred to interest-bearing savings accounts.

Looking beyond Q4, we continue to view 2023 as a transformational year for Robinhood as it stands to benefit from new products, such as its new IRA offering, Mizuho analysts said. The group is pricing Robinhood stock at Buy with a price target of $14, implying a significant gain from Wednesday’s opening level of $9.54.

The same analysts rate Coinbase at Underperform, and their target for the stock price is more than 40% lower than when shares opened on Wednesday. Proprietary research cited by the firm on Tuesday suggests that retail investors continue to shy away from crypto.

Write to Jack Denton at [email protected]

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