eToro Vs. Robinhood Stock: Why A Comparison Suggests eToro Could Halve In Value (FTCV) (2024)

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eToro vs. Robinhood: Q2 Earnings Reports

Robinhood (HOOD) and eToro (ETORO) each reported Q2 results in the last few days. eToro has announced the intention to merge with SPAC Fintech Acquisition Corp. V (NASDAQ:FTCV). Comparing the two is eye-opening.

Here are the most important points to note from a careful comparison of the eToro investor presentations and the Robinhood investor presentation:

1. eToro ended Q2 with 2M net funded accounts, compared to 22.5M net funded accounts for Robinhood.

2. eToro added 0.5M net funded accounts in Q2, compared to 4.5M for Robinhood.

3. eToro spent $155.7M on sales and marketing in Q2, equal to $311.40 per new net funded account. HOOD spent $94M on sales and marketing in Q2, equal to $20.88 per net new funded account. (The calculation is simple: total sales and market expenses divided by net new accounts added.)

4. Despite the massive customer acquisition cost in Q2, eToro increased its sales and marketing sequentially, from $137.4M in Q1 to $155.7M, while HOOD reduced its marketing spend sequentially, from $102M to $94M.

5. One of the metrics HOOD provides is average revenue per user, ARPU, defined as revenue for the quarter divided by average funded accounts for the quarter, multiplied by 4 to annualise the number. (Average funded accounts for the quarter is calculated as the sum of funded accounts at the end of this quarter and last quarter, divided by two.) On that basis, HOOD's ARPU was $112 in Q2. ($565M in revenue, divided by ((22.5+18.0)/2), multiplied by 4.) On that basis, eToro's ARPU using total trading commissions and other fees, was $361.9M divided by ((2.0+1.5)/2) multiplied by 4 = $827.

My takeaways about eToro from this data

First, it looks like eToro is desperate to grow its funded accounts at all costs before the SPAC merger date arrives. eToro spent a ton on marketing in Q2 with very poor return on investment ($311 all-in cost per new net funded account versus $21 for HOOD). The marketing environment for retail investing companies was less receptive in Q2, which is why HOOD cut its marketing spend. (Retail investing newsletter company MarketWise (MKTW) also reported a tougher marketing environment. You can read in MKTW’s Q2 earnings call transcript that it cut its marketing spend from $77.7 million in Q1 to $56.1 million in Q2.) But eToro raised its marketing spend, despite the poor marketing environment and high cost of customer acquisition.

Second, it's hard to see how FTCV doesn't trade down after the merger with eToro, based on HOOD's valuation. HOOD is trading at a market cap of about $42B, with over 10x the number of funded accounts than eToro. (It also added 9x the number of new funded accounts during the quarter than eToro did, 4.5M vs. 0.5M.) So if you value the companies based on number of funded accounts, eToro should trade at 1/10th the valuation of HOOD, which would currently give you $4.2B. According to the investor presentation, at a $10 stock price for FTCV, eToro would trade at a $10.4B implied market cap after the merger. A $4.2B market cap would imply a stock price of $4.38.

Third, eToro seems to be milking its 2M customers, generating an annualised average revenue per user (ARPU) of $827, compared to $111 for HOOD. Some investors might view this as a positive, arguing that eToro makes far higher profits per account than Robinhood. But the question is whether eToro’s revenues are aligned with its customers’ interests, and whether they are sustainable.

Problems with eToro’s revenue?

Here’s how eToro might be generating revenue in ways that are bad for its customers. According to the investor presentation, most of eToro’s revenues are from crypto trading, which is largely unregulated, allowing eToro to benefit from higher revenue from those trades. (We know this from Robinhood: its trades fell in Q2, but its revenues rose due to the shift from equities to crypto.)

Next, eToro pushes CFDs (contracts for difference), which are outlawed for retail brokerages in the US because they lead to losses for most retail investors. Regulators outside the US allow eToro to promote CFDs, but require it to post this warning to every visitor to its website:

Source: eToro

Note also that eToro’s average trades per customer in Q2 were an astonishing 72.6. (It reported 127M trades during the quarter, and the average number of funded accounts, using the same methodology as above, was 1.75M.) eToro promotes its “copytrading” as a wonderful thing for investors. But perhaps it’s a wonderful way for eToro to get its users to trade a lot more, generating massively higher trading profits per customer for eToro than other brokerages get.

I have not found disclosure in eToro’s investor presentations about average account size or total customer assets, but if the average account size is not large, and if copy-trading isn’t leading to meaningful account growth for those customers, eToro’s sky-high ARPU is prima facie confirmation of the allegations that eToro has a conflict of interest with its users.

What can be said in eToro’s defense?

Some investors might raise the following points in eToro / Fintech Acquisition Corp. V’s defense:

Isn’t eToro growing its funded accounts faster than Robinhood, with 33% sequential growth in Q2, versus Robinhood’s 24%? eToro’s funded accounts grew from 1.5M in Q1 to 2M in Q2, while Robinhood’s grew from 18.0M to 22.5M.

Yes, but the problem with that is that eToro is spending crazy amounts to acquire those new accounts, with fully loaded expenses coming out at $311 per net new account, versus $21 for Robinhood. It’s easy to buy growth if you don’t care about profitability.

Shouldn’t eToro trade at a higher multiple than Robinhood, because Robinhood suffers from massive exposure to questionable crypto currencies? Robinhood derived 41% of its revenue from cryptocurrency transactions, up from 17% in Q1, and 62% of its Q2 cryptocurrency transaction-based revenue was attributable to dogecoin vs. 34% in the prior quarter.

Yes, it’s certainly a problem for Robinhood that its customers follow short term trading fads, likely damaging their financial well-being. eToro certainly doesn’t have the same extreme exposure to dogecoin. According to its Q2 investor presentation, 11% of crypto revenues came from DOGE, 16% from XRP, 15% from ADA, 14% from ETH and 7% from Bitcoin (BTC-USD). But let’s not get too excited here: 73% of eToro’s revenues came from crypto trading.

eToro earnings: One final point

I’m wary of companies that omit critical data from their earnings presentations. Robinhood’s investor presentation shows sequential quarterly numbers for all the key metrics for the last 5 quarters. eToro hides those numbers. To derive the sequential changes in eToro’s numbers in Q2, you have to piece together the numbers from the Q1 presentation and the Q2 presentation, and you won't be able to find quarterly numbers before Q1.

Similarly, from what I could find, eToro doesn't publish its customer assets or its average account size. That matters a lot, because with massively higher revenue per funded account (ARPU) than Robinhood, small account sizes would confirm that eToro's customers are having a large percentage of their assets eaten by eToro's fees. (I’d be surprised if eToro’s average account size is large, because non-US investors who trade crypto, forex and commodities CFDs typically have small account sizes; and they don't grow over time, because on average trading those instruments leads to losses).

Perhaps most importantly, eToro does not disclose what percentage of its revenues come from CFDs. Yes, those instruments which 67% of its customers who use them lose money with, and which are outlawed in the U.S.

The bottom line on eToro

I'm keeping far away from eToro and Fintech Acquisition Corp. V. If you love Robinhood’s stock and are considering FTCV, my analysis of the publicly available data suggests that eToro is desperately buying growth (probably unprofitably), that the valuation the merger was set at is far too high, and that serious questions remain about conflicts of interest with its customers.

Update and correction: eToro did publish its total customer assets in its Q1 and Q2 reports. I missed it because it is not included in the KPIs & Financials section of the report as it should be. eToro's customer assets at the end of Q2 were $9.4 billion. Since eToro had 2 million accounts at the end of the quarter, this means that the average account size was $4,700, and the revenue eToro derived from its customers during the quarter was 3.85% of its customers' assets at the end of the quarter, equivalent to 15.4% of their assets on an annualized basis.

I work in equity research. I look for great companies to hold for the long term, but am willing to say when a stock is flawed. I focus on Tech and Fintech.