Robinhood’s account base increased to 18 million from 12.5 million in the first three months of 2021, as millions of new investors began trading stocks.
Dreamstime.com/Vladyslav Yushynov
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Robinhood is trying an unmatched feat in modern finance, or surfing for that matter: riding a wave that is crashing on top of it at the same time. The company announced its plans to go public on Thursday, a day after the Financial Industry Regulatory Authority, or Finra, fined Robinhood the most it has ever been for giving customers false or misleading information and operating a platform that is so unreliable that it repeatedly fails at critical moments, costing its customers money. (The company made no admissions or denials in response to the charges.)
The growth in retail trading, as well as, more lately, the meme stock and cryptocurrency craze, are the waves that Robinhood is riding. All of the main brokerage companies and apps have benefited from the excitement, but Robinhood has far surpassed its competition. Millions of new traders acquired in the first three months of 2021.
GameStop
(ticker: GME) and (ticker: GME)
AMC Entertainment Holdings is a company that produces movies.
Robinhood’s account base increased to 18 million from 12.5 million as a result of the (AMC) stock and options. That is almost certainly a brokerage business record. The action is so thrilling that many consumers appear to be installing the Robinhood app merely to watch it unfold—according to Finra, the company has around 13 million extra accounts with no funds. These numbers indicate that Robinhood is gaining ground on competitors with far longer histories.
Charles Schwab is a hedge fund manager.
As of May, (SCHW), the king of bargain brokers, had 32.1 million active retail accounts. At the conclusion of the first quarter, Fidelity had around 29 million retail accounts and 83.4 million total accounts. Robinhood was launched in 2013 on a simple but powerful premise: stock trading should not have any upfront fees or account minimums. The brokerage sector was forced to scramble as a result of these important breakthroughs. By the end of 2019, every other significant player had reduced their fees to zero. Although the elimination of commissions lost a significant source of revenue, brokers may have benefited from the change. Millions of Americans who have never traded stocks before have now done so. Some people are sticking to tried-and-true financial practices, putting money down gradually and diversifying their portfolios. Many others appear to be treating the stock market like a slot machine, resulting in an increase in dangerous options bets and wild swings in obscure stocks. The same reasons that propelled meme stocks to prominence also pose a threat to their long-term viability. As the GameStop deal became more active, Robinhood halted purchases of a number of hot equities, telling investors that it was obligated to do so to comply with clearinghouse rules. Other brokerages made changes to their trading guidelines around the same time, but they were generally more lenient. The Department of Justice, the Securities and Exchange Commission, Finra, and several state attorneys general are investigating Robinhood’s allegations regarding that incident. The trading halts have also resulted in almost 50 lawsuits. A search order was even issued for CEO Vlad Tenev’s cellphone by federal prosecutors. Other lawsuits have been filed in response to earlier app issues, such as trading outages in March 2020. It’s no wonder, then, that Dan Gallagher, Robinhood’s chief legal officer, was paid $30 million last year, the highest among the company’s top executives. Trying to assess Robinhood based on its financial indicators, as with other growth firms coming public with erratic earnings, is tough. Robinhood made a profit on $959 million in revenue in 2020, but it lost $1.4 billion in the first quarter of 2021, despite revenue quadrupling from the same quarter the previous year. Investors may place a value on Robinhood based on its current revenue of $2 billion. It’s not unthinkable for a company growing at this rate to be valued at more than 10 times revenue, if not more than 15 or 20 times. However, the trading frenzy would have to continue for Robinhood to sustain its momentum, and other brokerages have already noted signs that it is receding. Another criterion for valuing a firm is its ability to develop its customer base. However, determining the worth of each consumer might be difficult. The average age of Robinhood users is 31 years old, which is younger than that of more established brokerages. One disadvantage of having such a large user base is that customers frequently have lesser account sizes. Finra said in the enforcement action that the median Robinhood customer had $240 in an account, and the average had roughly $5,000 as of February. Robinhood does not break out how much money its normal customer has in an account. That’s a long cry from brokerages like Schwab, which said last year that the average household has $320,000 invested. When asked about the average and median account sizes, a Fidelity spokesman merely noted they were “far larger than what we’ve seen in media stories about Robinhood.” Other brokerages make money in a variety of ways, including lending out customer deposits, but Robinhood relies heavily on trading volume. Payment for order flow, which means it is paid by market-makers that execute orders for Robinhood users and take a portion of the spread between the bid and ask prices, accounts for 75 percent to 80 percent of its revenue. The Securities and Exchange Commission is currently looking into whether payment for order flow should be altered or limited since it generates conflicts of interest that could harm customers. Furthermore, options trading accounted for roughly half of Robinhood’s transaction revenue in 2020, which is being scrutinized by regulators due to its inherent dangers. Other types of volatility are introduced by another crucial aspect of Robinhood’s business model: bitcoin trading. It accounted for 17% of the company’s income in the first quarter, up from 3% in 2020, and more than a third of that came from trading Dogecoin, a joke cryptocurrency whose value is strongly dependent on Elon Musk’s tweets. Companies that have been exposed to Bitcoin, such as
Tesla
(TSLA) and (TSLA)
Square
(SQ) trades as if it were the cryptocurrency itself at times. In a nod to its legacy of democratizing finance, Robinhood aims to allot up to 35 percent of the shares in its initial public offering to its own clients. However, retail investors may not be as enthusiastic about the IPO as Robinhood would like. Some Redditors have already stated their intention to sell the stock short. It’s been a lot of fun riding the trade wave this year. It’s possible that the firm will not like which way it breaks next. Avi Salzman may be reached at avi.salzman@barrons.com./n
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