Robinhood files confidentially for IPO: Here's why I'm NOT buying
This was originally supposed to be a rebuttal to @mcd's similarly titled post, but it got too long so I decided to write it out as a memo instead.
I agree that Robinhood made contributions that moved the retail investing space forward by many leaps and bounds, which I personally will always be grateful for, but to call it a 1000% stock and to buy on day 1 is...optimistic, 200% at best and even then I only see that happening in two scenarios:
1- It gets acquired and becomes a part of a bigger player's offering. The acquihires alone make this worthwhile.
2- It acquires and integrates another product that fundamentally changes how customers interact with their platform (cough...CommonStock...cough).
Since no one actually has the data on their user activity, especially after the recent series of backlashes, admittedly my bear thesis is just as much speculation as the bull thesis, but the limited data we do have tends to support the bear thesis. Differing perspectives are healthy (that's why this awesome platform exists 😉) and by all means please feel free to critique.
The core of Robinhood's revenue is Payment for Order Flow (PFOF), over 55% last I checked. The more users trading, the more money they make. Anything impacting the number of users or how often they trade is a hit to their bottom line, and there are several factors diminishing both that are currently in play.
1- ⬇ Brand Sentiment -> ⬇ Users : Let's start with addressing the elephant 🐘 in the room. The internet overwhelmingly doesn't like Robinhood right now, and a lot of that negative sentiment is coming from the same early adopters that were once its most staunch defenders that helped drive it to where it is today.
"It takes 20 years to build a reputation and five minutes to ruin it", and losing their most loyal users does not bode well. They may be seeing an influx of new users now, but those tend to be fickle, and there's no telling how long they will remain active on the platform; Robinhood is now viewed as more of a "starter broker", before you move on to a "real broker". Moreover, their core demographic of money/tech savvy Gen Z and Millennials have become increasingly well informed on the inherent conflict of interest in their business practices which was highlighted in the past few months, and this demographic has shown time and again that they have no qualms about not doing business with a company they don't like (how many people still use Facebook?).
Lastly, the claim that they saw an influx of new users is a vanity metric that tells me very little about the actual state of the platform (which I can't help but feel was an intentional move on the marketing team's part). I'm more interested in how many trades are going through them right now.
2- ⬆ Competition -> ⬇ Users : Robinhood pioneered $0 Commission trading, but it's now the norm on all major brokerages, of which there are many available and many more on the way, each with their own strengths and weaknesses (I count at least 11 others); i.e. users have options. Moreover, the better established brokers are learning how to engage with the younger audience that traditionally makes up most of Robinhood's user base and are working to address deficiencies in their own platforms (never thought I'd see the day when a Fidelity rep is doing an AMA on Reddit https://www.reddit.com/user/fidelityinvestments/comments/lfbi3u/hey redditimgregg murphy at fidelity/). The cherry on top of all this is that unlike many of its competitors, Robinhood isn't even profitable at the moment; blitz scaling only works if you're able to sustain your competitive advantage, which they have failed to do.
3- ⬇ UX -> ⬇ Trades : Robinhood's UX is its claim to fame and main differentiator from other brokers as far as the average user is concerned. Their UI that encourages frequent trading has been put under increased scrutiny, to the point they've had to modify some of it to avoid further backlash. Gone are the days when they could recklessly optimize for user engagement. Moreover, with competitors like Alpaca providing the most complex part of the product - the backend - as an easy to use API, quite literally anyone with some front-end experience can launch a comparable product in a very short amount of time.
4- ⬆ Regulation -> ⬇ Revenue from trades : The high-frequency trading that is a cornerstone of why payment for order flow is so profitable is being regulated further and further each month, and it seems to be on the way out thanks in no small part to the efforts of exchanges like IEX. Riddle me this: what happens to Robinhood when it can't make money off of PFOF?
In conclusion, bar some amazing miracle pivot from the amazing team at Robinhood, I don't see a solid value proposition, a good long-term outlook, or a defensible position for the company, which is why I'm not buying. Frankly, the strength of their team and technology is the only reason I'm not buying puts or shorting on day 1, but I'd wait until share lockup ends anyway 😉.
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I love hearing all sides! This is what healthy debate should look like! Just wish there was more of a conversation 😕