Robinhood - The Millennial Investing Juggernaut
Last week, millennial-favorite stock trading app and Warren Buffett appointed "casino" Robinhood released their long-awaited S-1 filing to the SEC, which is the document required to go public and list on an American stock exchange. In classic bad luck fashion, they released the document literally minutes after I published my piece on their historic FINRA fine payment last week. One reader asked me to jump into the financials, so here we go!
Top-line Numbers:
Private Market Valuation: $55 billion
Total users: 18 million funded accounts
Assets Under Management: $80 billion
2020 Net Revenue: $959 million (vs $278 million in 2019)
2020 Net Profit: $7.45 million (vs $107 million loss in 2019)
2021 Q1 Net Revenue: $522 million
2021 Q1 Net Loss: $1.4 billion
How Did Robinhood Get Started?
Seemingly with every great startup, this one was founded by two former roommates at Stanford University. In 2013, Baiju Bhatt and Vlad Tenev set out to change the business
model generally associated with digital brokerages. The old model was heavily commission based, with brokerages charging anywhere from $5-$20 per trade. Bhatt and Tenev set out to bring this cost to $0, and to remove the account minimums that were often a barrier to entry for new investors. The app quickly picked up steam due to it's no-commission structure, no account minimums and extremely easy user design. Robinhood became the fastest growing brokerage in history and became the first finance app to win an Apple Design Award for its excellent mobile experience.
So What's The Business?
Stock trading! This app is a phenomenal stock trading experience in terms usability and accessibility. In 2016, Robinhood rolled out "Robinhood Gold," which is their recurring revenue subscription model. This tier of membership grants users higher instant deposit limits, more in-depth charts and access to margin.
However, Robinhood Gold is not the brokerage's main source of revenue. The founders pioneered a new revenue stream called "payment for order flow" (PFOF), which essentially allows market makers to pay Robinhood for the right to execute a trade. This has, many users argue, caused trade interruptions and trade executions that are not in the best interest of the user.
So Should I Invest In Robinhood?
This company is a public sentiment nightmare. While the growth and revenue numbers are eye-popping, you begin to find cracks in the armor when you dig a little deeper. The company experienced staggering growth during meme-stock mania in early 2021, with account openings and trade volume jumping exponentially. You'd think that would be great for the platform, except for the public relations fallout that ensued from freezing trades on the most popular shares and tapping enormous lines of credit to cover the absurd trading volume, which accounts for that net loss of $1.4 billion in the quarter. The halting of trades also forced Tenev to testify in front of Congress, and he was subject to a live grilling from Barstool Sports President Dave Portnoy in a video Twitter Q&A.
Robinhood has also stretched into cryptocurrency trading, becoming a haven for those that traded the popular Dogecoin from February to April of 2021. The frenzy around Doge actually took down the Robinhood platform for several days, resulting in users being unable to offload their positions and were left "hodling" the bag.
This isn't the first time the platform has had technical issues. The platform has cratered multiple times in 2020 and 2021, leading to outcries on social media and the poor Community Manager running the @RobinhoodHelp Twitter account gasping for air. This has also led to intense litigation for the company. Last week, they paid $70 million to FINRA, the governing body's largest ever fine. They also paid $65 million to the SEC after they were charged with misleading customers about how the company makes money (shoutout to order flow) and failing to delivery the best execution of trades. Their S-1 filing revealed they are the subject of 49 class action lawsuits, and they are now being sued by the family of Alex Kearns, a former Robinhood customer who took his own life after a platform glitch showed his account at negative $730,000.
That anger has resulted in 49 class action suits currently against the company related to anger from trading restrictions in 2021, the S-1 disclosed. - Yahoo News
Will I Invest In Robinhood?
Dear god no. Robinhood is a palace built on sand. It's a beautiful app with a very streamlined experience and is criminally easy to use. It makes a TON of money, and I personally have my taxable brokerage with them, if only for the reason that it's SIPC insured. Once you begin to analyze how the company makes money, however, the sand begins to shift. According to the S-1, 75% of their revenue comes from the PFOF model, a model which landed them in hot water with the SEC and resulted in that $65 million fine. Any change to that business model and this company is a dramatically different proposition.
I also talked earlier about cryptocurrency. While I believe that coins like Bitcoin and Ethereum have a real future, Robinhood made most of its crypto-based revenue from Dogecoin trading. Trading volume for the meme-inspired currency rose 258% in the second quarter of 2021, and this helped generate $30 million in revenue for the brokerage.
Finally, they're getting high on their own supply. Robinhood is reserving "20% to 35%" of its own Class A voting shares so it can sell them to their customers via their newly unveiled IPO-buying feature.
This company is a "cult of personality" stock that I would lump in with Tesla. These are successful, proven companies that generate good revenue, but something is just broken about them. With Tesla, it's an enigmatic founder who tweets nonsense about cryptocurrency and picks fights with the SEC. With Robinhood, the PFOF revenue model is just too much for me to look past. Will I be wrong? Almost certainly! But I'll sleep better at night knowing my money is tied up elsewhere.
Short-term: Short
Long-term: Short
The following article does not constitute investing advice and is for entertainment purposes only. Please do your own research and do not buy or sell anything based purely on what you read here.
