A combination of boredom, lack of dopamine alternatives, stimulus cheques and the gamification of markets led the USA-based online stockbroker Robinhood from relative obscurity into a multi-billion dollar empire.
This slick operation has amassed an estimated 20 million brokerage accounts and attracted a last-recorded $20 billion fair value (even though shares have reportedly traded on the secondary market implying a $40 billion fair value).
Closer to home, the Purple Group’s EasyEquities operation has pioneered both domestic fractional share ownership and mass, low-cost online brokerage for the retail market.
While there are fundamental differences between EasyEquities and Robinhood (other than geographic, the most notable is that EasyEquities earns off brokerage while Robinhood earns off ‘order flow’ sales; in other words, where it sells your trading data to the highest bidder), the ultimate drivers of these brokerages are actually quite similar: low cost, easy access to financial markets with a slight gamification-element thrown in.
So how does EasyEquities stack up next to Robinhood and what can this imply about its (and ultimately Purple Group’s) fair value?
Last reported operating stats
|Robinhood||20 000 000||$682 000 000||$34|
|EasyEquities||1 000 000||R152 459 000||R152|
|EasyEquities (dollarised)||1 000 000||$10 661 469||$11|
Sources: Various reports, Purple Group segmental reports, and some estimations and rounding (USD/ZAR of R14.30 used)
Little surprise that Robinhood is about 20 times the size of EasyEquities.
Interestingly, it only earns about three times the revenue per account, thus the revenue-generating ability does not necessarily scale up with its incremental size. This also implies that EasyEquities may have room to lift its monetisation of each account, or just that emerging market retail investors have less money than developed market retail investors.
These rough comparisons are interesting, but can we extrapolate a fair value for EasyEquities from this?
Absolutely. It will have flaws but we can arrive at an answer using Robinhood’s last reported fair value of $20 billion as a yardstick.
Follow the logic here:
- If Robinhood and its 20 million accounts are worth $20 billion, then it is worth $1 000 per account.
- If EasyEquities earns around a third of the revenue per account that Robinhood does, this implies that the business is worth around a third of the value that Robinhood is per account.
- Hence, EasyEquities could be worth around $313 per account.
- Since EasyEquities has one million accounts, this implies that it is worth $313 million in total.
- Using a USD/ZAR of R14.30, this implies that EasyEquities is worth around R4.5 billion.
- Since Purple Group owns 70% of EasyEquities, this implies that its stake in this business is worth around R3.1 billion.
- Since Purple Group has around a billion shares in issue, this implies that EasyEquities is worth about 300 per Purple Group ordinary share.
There are flaws in this analysis and the data may not be up to date. No argument from my side against those who shoot this matchbox calculation down (although I do challenge them to come up with an alternative valuation).
That said, even if EasyEquities’ fair value of around 300 cents per share (cps) per Purple Group share is half wrong (and only worth 150 cps), then the fact that Purple Group shares are trading at 130 cps implies that the share is too cheap.
Oh, and you get the rest of the Purple Group for free.
Keith McLachlan – Integral Asset Management investment officer.