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Robinhood $HOOD Breakdown
Time Investor's checkout the breakdown of Robinhood ($HOOD), the fintech company that wants to become the go-to app for money.
📖What is Robinhood?
Robinhood is a stock-trading, investing tech company that provides everyone commission-free trading. The company is proud to have created an intuitive platform that makes investing easy.
- The company’s mission and vision: The company’s mission is to democratize finance for all. Their vision is to become the most trusted, lowest-cost, and most culturally relevant money app worldwide. They simply want to allow everyone to participate in the financial system regardless of wealth, income, or background.
If you want to read the full breakdown, click here ➡️ Robinhood Breakdown
Customer Landscape and Partnerships:
- Users:
- Net Cumulative Funded Accounts: Q1 2021: 18.0M (151%) | FY 2020: 12.5M (143%)
- Monthly Active Users (MAU): Q1 2021: 17.7M (106%) | FY 2020: 11.7M (172%)
- Average Revenue Per User (ARPU): Q1 2021: $137 (65%) | FY 2020: $109 (65%)
- Cohort Annual Revenue: 2017 Cohort returned 30M (7.6x) in revenue in 4 years | 2018 Cohort returned 86M (4.2x) in revenue in 3 years | 2019 Cohort returned 75M (3.9x) in revenue in 2 years | 2020 Cohort returned $326M (1.0x)
- > 50% of users are first-time investors
- > 80% of user were mainly acquired through the Robinhood Referral Program and the remainder organically
📈Market Opportunity
The stock market is defined as one of the greatest inventions in the capital markets to increase wealth. Historically the S&P 500 has produced on average a 10-13% annual return. But many Americans experienced limited or no access at all in the wealth generation process by the markets. With finance technology, the barriers that once existed preventing ordinary citizens from access are deteriorating rapidly. Realizing this some market dynamics are evolving:
- 2019 Pew Research Survey revealed that 60% of Americans do not have investments outside of their retirement accounts
- 2020 Gallop Poll revealed 68% of young adults (18-29) have no money invested
- 2020 Harris Poll revealed two-thirds of Americans would consider financial products from technology platforms
- Retail Investing represents about 20% of all American households.
- 30% of Retail Investors place orders using a mobile app and 59% for participants at age 18-34 – FINRA survey.
The company reports from insights by Charles Schwab that U.S. retail investors have total assets of $50 trillion. With over half of the retail investors revealing Robinhood as their first brokerage account, a strong market share is inevitable. Additionally, the crypto market is currently valued at $1.3T (with Bitcoin representing about 46% of the market cap). As young retail investors are open to the developing ecosystem, the ability to access crypto investments is crucial. Simultaneously, the opportunity to offer FDIC ensured cash management solutions like traditional banks opens additional market opportunities. There are over $1 trillion in brokered deposits in the U.S and $3.6 trillion in credit card purchase volumes as well. Robinhood is positioned to operate in an ecosystem that is ripe for disruption.
🤯Key Insights for Time Investors:
- Revenue Risk: Majority of the revenue generated by Robinhood comes from payment of order flows. This is highly driven by option trading, which is one of the riskiest forms of trades to make as an investor. A reduction in spreads between the bid and ask price, reduction in trading activity, and any regulation regarding the relationship with market makers can severely impact 81% of the company’s revenue. Additionally, a substantial driver for growth in Q1 was driven by cryptocurrency trading, and more specifically Dogecoin, which represented 34% of the cryptocurrency transaction-based revenue.
- Brand Degradation: There has been a wave of negative media coverage as well as litigation/settlements with government entities regarding the Robinhood practices, “gamification” of investing, and operational outages.
- December 2019: Robinhood settled with a $1.2M fine for noncompliance with best execution practices with FINRA, a self-regulatory organization.
- December 2020: Robinhood paid $65M to SEC for an investigation into best execution and PFOF practices.
- More recently, FINRA fined Robinhood ~$70M for the systematic outages, misleading communication, and trading practices (this is the largest penalty from FINRA)
- There are a host of other class actions in play as well.
- Competition: The ecosystem is also extremely competitive with incumbents like Charles Schwab (32M accounts), Fidelity (83M accounts), E-Trade (7M accounts), and TD Ameritrade (11M accounts). In the space, Consolidation is occurring to secure market share. Similarly, new entrants like Etoro (20M), Webull, and Public are in direct competition.
- Government Regulations: The GameStop/Meme stock fiesta has certainly raised the flag causing government regulatory bodies to increase their focus. Payment of order flows is on the table with the potential legislation that is recently introduced to completely prohibit the practice. In addition, Gary Gensler, Chairman of the SEC, has proposed key focus on the following concepts: 1) PFOF 2) Gamification 3) Disclosures under trading restrictions 4) Margin requirement sufficiency 5) Managing liquidity risk 6) Mobile-app features such as rewards, push notification.
- Robinhood, spawned from the idea of democratizing finance and with a grandiose vision of becoming the go-to app for money! This idea is very addictive, especially when it involves the traditional story of Wall Street. When I think about Wall Street and the narratives that have circulated across for years, three words come to mind: wealth, fraud, and privilege. Keeping this in mind, any company that delivers a message of enabling anyone regardless of wealth, income, or background can suddenly become extremely popular.
- Robinhood began with a splash introducing a simple, beautiful, and intuitive design for any user regardless of their experience. They did a great job removing friction caused by learning a new technology platform. Once you get approved and funds are deposited, you can immediately start investing and trading. To continue with this success, they pioneered a “commission-free” trading business model that took the industry by surprise causing all the incumbents to follow suit in 2019. They coupled this strategy with a stock referral program and BOOM you have significant growth. In eight years, they added 18M users with funded accounts and in the first quarter of 2021, they attracted 5.5M users. This is explosive and a success that the company should take pride in. From a brand perspective, Robinhood has associated itself with retail investing and if interests are high in participating in the markets, they will remain a strong player.
- As a Time Investor, it is important to understand Robinhood holistically. As a fintech company, they are performing quite well, and they have made investing easier for everyone. However, there are serious regulatory and brand issues that Robinhood needs to navigate to truly democratize finance and become “the most trusted, lowest cost, and most culturally-relevant money app worldwide”. In my opinion, the fact that Robinhood is still here and widely used with all the negative media attention, reveals how unique their product design is and how resilient their brand is as well. As a long-term public investor, I would personally wait and see how everything develops over the next two years. Now, I do wish I were part of the seed round or Series A round in Robinhood, which for those who participated will exceed a 100x return (congratulations!). I am personally curious to see how Robinhood evolves in the public eye and hopefully, they can accomplish their mission and vision regarding investing and money.
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Robinhood ($HOOD) Breakdown
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Great post. Whether revenue concentration (esp on dicey business model like pay for order flow or let's say 'high-risk' investing like option and crypto). Only reason on my watchlist atm is to better understand retail investing trends.
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