Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

<ul>
<li>This model uncovers companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.</li>
<li>The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business.  </li>
<li>Breaking Estimates stocks often continue to decline after the cuts.  This week we flag Robinhood Mkts, Seagen, Zimmer Biomet, Cerence</li>
</ul>


This model uncovers companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.
The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business.  
Breaking Estimates stocks often continue to decline after the cuts.  This week we flag Robinhood Mkts, Seagen, Zimmer Biomet, Cerence


Breaking Estimates Short Candidates: Robinhood Mkts, Seagen, Zimmer Biomet, Cerence

Insurance & Central Asia-focused Analyst, KT Capital Group

Alec Tseung

Insurance & Central Asia-focused Analyst

KT Capital Group

Principal investments and advisory firm that focuses on connecting the CIS countries with East Asia.

Principal investments and advisory firm

<ul>
<li>
<a href="https://www.smartkarma.com/entities/coinbase-global-inc" target="_blank" data-smartkarma-citation="entities:32227:1" rel="noopener">Coinbase (COIN US)</a> has significant growth potential in non-transaction revenue with its crypto platform strategy and various initiatives underway.</li>
<li>This would also help the company move away from competing just on fees in the long run, although fee compression is unlikely to materialize in the medium term.</li>
<li>Using P/S ignores the company's profitability. On a P/E basis, the company's valuation looks reasonable compared to other major Fintech/payments peers.  </li>
</ul>



Coinbase (COIN US) has significant growth potential in non-transaction revenue with its crypto platform strategy and various initiatives underway.
This would also help the company move away from competing just on fees in the long run, although fee compression is unlikely to materialize in the medium term.
Using P/S ignores the company's profitability. On a P/E basis, the company's valuation looks reasonable compared to other major Fintech/payments peers.  


2022 High Conviction: Coinbase Is More Than Trading Coins

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

<p><a href="https://www.smartkarma.com/entities/robinhood-markets-inc" target="_blank" data-smartkarma-citation="entities:33532:1" rel="noopener">Robinhood Markets (HOOD US)</a>'s share price has been trending downwards in the past few weeks after reaching a 52 week high of $55 per share on 2 August. Robinhood's share price has declined to $40.93 per share, which is now approaching the IPO price of $38. In our view, there are two major factors including a potential ban on payment for order flow and lower trading activity that are likely to lead to lower share price in the weeks ahead. </p><p><strong>Potential Ban on Payment for Order Flow (PFOF) - </strong>All in all, there does not seem to be an overwhelming evidence to suggest that SEC will side with the status quo and not ban PFOF. Although the probability of banning PFOF may be less than maintaining the status quo, the former could involve a significant slash in Robinhood's share price.</p><p><strong>Lower Trading Activity on a QoQ Basis - </strong>As of September 2021, new downloads of <a href="https://www.barrons.com/articles/two-problems-loom-for-robinhoods-stock-51632930724" target="_blank" rel="noopener">Robinhood app</a> are estimated to be down about 78% on a QoQ basis. Daily active users are down about 40% YoY. The recent increased volatility in the global equities and cryptocurrencies markets have caused millions of retail investors in the US to become more cautious and they have not been as active in trading stocks and cryptos in the past three months as compared to 1H 2021. Given that transactions based services accounted for 80% of total revenues in 1H 2021, a decline in active trading of stocks and equities would negatively impact the company.</p>

Robinhood Markets (HOOD US)'s share price has been trending downwards in the past few weeks after reaching a 52 week high of $55 per share on 2 August. Robinhood's share price has declined to $40.93 per share, which is now approaching the IPO price of $38. In our view, there are two major factors including a potential ban on payment for order flow and lower trading activity that are likely to lead to lower share price in the weeks ahead. Potential Ban on Payment for Order Flow (PFOF) - All in all, there does not seem to be an overwhelming evidence to suggest that SEC will side with the status quo and not ban PFOF. Although the probability of banning PFOF may be less than maintaining the status quo, the former could involve a significant slash in Robinhood's share price.Lower Trading Activity on a QoQ Basis - As of September 2021, new downloads of Robinhood app are estimated to be down about 78% on a QoQ basis. Daily active users are down about 40% YoY. The recent increased volatility in the global equities and cryptocurrencies markets have caused millions of retail investors in the US to become more cautious and they have not been as active in trading stocks and cryptos in the past three months as compared to 1H 2021. Given that transactions based services accounted for 80% of total revenues in 1H 2021, a decline in active trading of stocks and equities would negatively impact the company.

Robinhood - Impact of the Potential Ban On PFOF & Lower Trading Activity

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

<div>A pandemic fuelled retailed trading frenzy and strong market performance in 2020 enabled <a href="https://www.smartkarma.com/entities/futu-holdings-ltd" target="_blank" data-smartkarma-citation="entities:27858:1" rel="noopener">Futu Holdings Ltd (FUTU US)</a> to benefit from unprecedented growth in paying client additions and trading activities.  A recent USD1 trillion selloff of China offshore equities and a shift in investor sentiment however, compounded by escalating regulatory scrutiny, has led to concerns whether the high growth seen in 2020 and early 2021 would persist in coming quarters.  We lay out 4 hypotheses for a potential negative re-rating focused on growth declines, continued investments, regulations, and licensing concerns. </div>

A pandemic fuelled retailed trading frenzy and strong market performance in 2020 enabled Futu Holdings Ltd (FUTU US) to benefit from unprecedented growth in paying client additions and trading activities.  A recent USD1 trillion selloff of China offshore equities and a shift in investor sentiment however, compounded by escalating regulatory scrutiny, has led to concerns whether the high growth seen in 2020 and early 2021 would persist in coming quarters.  We lay out 4 hypotheses for a potential negative re-rating focused on growth declines, continued investments, regulations, and licensing concerns. 

Futu Holdings - An Inflection Point Imminent?

Equity Capital Markets

Robinhood Markets  / Equity Capital Markets

<div class="content-highlight">
<p>Our base case valuation of Robinhood is implied market cap of US$25.1 billion or US$29.8 per share, which is 25% lower than the mid-point of the IPO price range (US$40). Given the downside risk, we would AVOID this IPO. </p>
<ul><li>Our valuation of Robinhood is based on an EV/S multiple of 10.7x using our estimated sales of US$2.1 billion in 2022. <ul>
<li>The EV/S multiple of 10.7x is based on the average multiple of the comps in 2022.</li>
<li>The valuation multiple is higher than the those of online brokers Charles Schwab and Interactive Brokers Group.</li>
<li>However, it is lower than the valuation multiples of the fintech comps including Coinbase and Affirm.</li>
</ul>
</li></ul>
</div>


Our base case valuation of Robinhood is implied market cap of US$25.1 billion or US$29.8 per share, which is 25% lower than the mid-point of the IPO price range (US$40). Given the downside risk, we would AVOID this IPO. 
Our valuation of Robinhood is based on an EV/S multiple of 10.7x using our estimated sales of US$2.1 billion in 2022. 
The EV/S multiple of 10.7x is based on the average multiple of the comps in 2022.
The valuation multiple is higher than the those of online brokers Charles Schwab and Interactive Brokers Group.
However, it is lower than the valuation multiples of the fintech comps including Coinbase and Affirm.




United States

Robinhood Markets, Inc. operates a financial services platform. The Company offers brokerage and cash management applications such as stocks, exchange-traded funds, options, and cryptocurrency. Robinhood Markets serves clients in the United States.

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Robinhood Markets (HOOD US)

Breaking Estimates Short Candidates: Robinhood Mkts, Seagen, Zimmer Biomet, Cerence

This model uncovers companies facing recent declines in estimates. This week we flag Robinhood Mkts, Seagen, Zimmer Biomet, Cerence

Eric Fernandez, CFA

2022 High Conviction: Coinbase Is More Than Trading Coins

The fast development in the broader crypto economy could present significant growth potential to Coinbase (non-transaction revenue). This will...

Alec Tseung

Robinhood - Impact of the Potential Ban On PFOF & Lower Trading Activity

In our view, there are two major factors including a potential ban on payment for order flow and lower trading activity that are likely to lead to...

Douglas Kim

Futu Holdings - An Inflection Point Imminent?

Strong retail participation and market performance enabled Futu Holdings to benefit from strong growth. Given a shift in investor sentiment, we...

Jason Yap, CFA

Robinhood IPO Valuation Analysis

Our base case valuation of Robinhood is implied market cap of US$25.1 billion or US$29.8 per share, which is 25% lower than the mid-point of the...

Douglas Kim

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