Robinhood, is it really as good as it seems?

Robinhood is the favorite platform for retail investors and a pioneer in commission-free investing. The company may be most known for its role in the Gamestop/AMC saga, where the company had to halt trading due to capital restraints, and all the drama that followed it. Although not planned, it is funny to see this happening again this week. Robinhood is most known for its role as the retail investment platform, the company does a lot more, and in this analysis, we will find out what exactly and how the company is growing because of it. If you want to watch this report in a summarised video, you will find a link to a YouTube video at the buttom that covers most of this article in about 15 minutes. Let’s not waste any time and just dive straight into it.

- What Products Does Robinhood Offer?
Robinhood started by offering a trading platform that pushed for commission-free trading, something they pioneered. This attracted a lot of retail investors and traders which has resulted in the company getting a reputation for “dumb money investors” which was solidified by the WallStreetBets movement when retail traders bought into stocks like Gamestop and AMC and seemingly all doing so through Robinhood. The company is of course trying to lose this image and one of the ways it is doing so is by releasing new products to a wider spectrum of possible clients. Let’s look at the segments and what products fall under them.

Brokerage
The brokerage platform has been consciously designed to facilitate the needs of the retail investors as well as Robinhood possibly can, this has been done through the initiatives of:
- Investing, the platform allows its users to buy and sell stocks without paying commissions on U.S. listed stock and ETF.
- Options trading, buying and selling options without commissions
- Fractional shares, buying fractional shares of companies
- Recurring investments, simply install the frequency of inflows and Robinhood will automatically buy the wanted stocks for you
- Investing on margin, Robinhood offers the option to invest on margin
- Fully-Paid securities lending, where the owner of the stock allows Robinhood to lend their fully owned shares and gets paid interest on the shares that are lent out
- Cash sweep, allows Robinhood to sweep the uninvested funds to partner banks where interest is earned on those funds. This interest income is built on a daily basis, and paid on a monthly basis.
- Instant Withdrawals, take your cash from the platform at an instant
- Robinhood retirement, this allows customers to bring their IRAs under custody at Robinhood
- 24-hour market, a product that is being pioneered by Robinhood and one of the very few brokers that offer this, This is 24/5, not 24/7
- IPO access and direct share program
- Robinhood Crypto

Gold
For the cost of $5 per month, or $50 per year, Robinhood offers a bunch of extra features. These features include higher deposit matches (3% in an IRA account for example), and higher interest on the Cash Sweep program, at this moment that number stands at 5%, compared to a US national average of 0.6% according to the Robinhood website. However, this will fluctuate with the changes in federal interest rates.
The Gold membership will make the Robinhood CreditCard accessible, which provides a 3% cash back. The Gold membership will soon give a match of 1% on each deposit. As I already mentioned the 3% IRA match, it’s important to note that this will be for deposits made every single year, as a bummer, you will need to be subscribed to Robinhood Gold for an entire year to keep the 3% match. So subscribing for one month to get the reward will not work.
The membership also allows for $50.000 of deposits per day, and a lower interest rate on margin at 8%, without the membership, the interest on margin is 12%.

The perks of this membership are truly amazing for just $5 per month, or $50 per year. I can see why this membership is growing as fast as it is. The annual run rate should be $140 million after Q1’24, compared to $104 million in the year prior quarter.

- Sales Channels
Robinhood has increased marketing spending significantly over the past year as the marketing spend went from $26 million in Q1’23, to $67 million in Q1’24. This increased marketing spend has resulted in big inflows of cash to the platform, as Tenev has said that with the introduction of the gold platform and expanded product offering, they see an increase in customers that have far more capital on their accounts.

- Main Sales Regions
Robinhood is mostly active in the US. This is their original market, but they are expanding towards Europe and the UK. Europe now has excess to the Robinhood Wallet, while the UK has excess to the trading platform since the end of 2023.

- Who are the people running this company?

Vlad Tenev, CEO
Tenev is the co-founder of Robinhood and has been leading the company since its inception in 2012. What Linkin doesn’t show is that Tenev initially started Celeris together with Baiju Bhatt in 2010. The idea was dropped in early 2011 to start Chronos Research which was then dropped in favor of Robinhood. Tenev was born in Bulgaria in 1987.

Baiju Bhatt, Co-Founder and former Chief Creative Officer
Bhatt and Tenev met at Stanford University where Bhatt earned a master’s degree in Mathematics. I could upload the resume Bhatt has on LinkedIn as well, but this looks similar to the one of Tenev so I will skip it for now.

Jason Warnick, CFO
In 2018, Warnick joined Robinhood from Amazon, after a tenure of nearly 20 years. His latest role at that company was VP of Finance, and Chief of Staff to the CFO. Warnick is 52 years old.
Source from Robinhood Newsroom

Steven Quirk, Chief Broker Officer
Quirk started his professional career as a market at TradeLink, where he worked for 20 years from 1987, to 2007, after which he switched to TD Ameritrade as EVP Trading, this is quite significant as TD Ameritrade is the biggest active traders platform, the only platform that is bigger according to Tenev, he mentioned this during his Q4’23 earnings call.

Daniel Gallagher, Chief Legal Officer
Gallagher joined Robinhood in 2020 as the Chief Legal Officer. Before joining the business, he was in the legal departments of various other financial companies, but his experience from 2011, to 2015 is what is most interesting, because during this time, Gallagher was a commissioner at the SEC. Something that might come in handy as Robinhood currently faces issues over selling crypto as a security.

- How is the company growing?

Before looking into the numbers, let’s look at the strategies that Robinhood implements in order to grow, starting off with winning the active trader. In order to track its success in this strategy, Robinhood tracks the Notional Trading Volume Market Share. The company tries to implement continual improvements on issues that could make active traders leave for different platforms like TD Ameritrade. The introduction of 24/5 trading, upgraded advanced charts, and stock screeners are examples of this. Robinhood is also trying to push the Wallet as this gives a larger pool of customers to push the Gold membership, Credit Card, and Retirement products towards. International expansion is also being chased as Robinhood expanded the trading platform for a launch in the UK and the wallet in multiple countries within the EU.

Growth through transactional revenue
Robinhood realizes transaction revenue through the sale of order flow. The orders are routed to partnered market makers which will result in receiving consideration. Those fees are known as PFOF (payment for order flow) in options and equity trading.

Net Interest Revenue
Revenues from interest are achieved through the spread between interest on the cash sweeps, but also through margin loans, cash and cash equivalents, and carried credit card balances. Robinhood has seen immense growth in this category as inflows to the platform have been very strong throughout 2023.

Other revenues consist of the Robinhood Gold Membership.

The company is doing a lot in marketing, where they for example give 1%, to 3% matches on deposits. This sounds like a very aggressive customer acquisition strategy, but as mentioned during the Q1’24 earnings call, it’s actually not to bad. Robinhood aims to retrieve the 3% match within 3 years, yes I find that aggressive but if they eventually can make profits on these users, and can do so over the collective of this group, they should be good. But once again, I do find it a long period. The 1% matches the company rewarded during 2023 are made whole already, and that is why I say it’s not as aggressive as it sounds.


- Balance Sheet and Income Statement

AS Robinhood has already released Q1’24 earnings, I will show both the 2023 year ending balance sheet, because there are quite some differences in there.

2023 Year End Balance Sheet

Q1’24 Balance Sheet

What I want to point out here is starting with the change in the amount of assets and liabilities there is between just that 1 quarter, that’s insane, but also very easy to explain. The rapid change in the balance sheet come through the crypto safeguarding obligation. This line item cancels itself out as it is the same on both the asset, and liability side.
This number went from about $8 billion at year-end 2022, to $14 billion at year-end 2023, to $26 billion a quarter later. This is important to remember, as in my opinion, it’s the most important part of this balance sheet. So let’s look at the income statements.

FY23 Income Statement

Q1’24 Income Statement

When we first look at the FY23 income statement we can see that transaction revenues were down from FY22. This is quite notable as we have seen the AI boom in ‘23. This however could also mean that Robinhood users simply bought the best stocks and held them. When we look at Q1’24 however, we can see that the number has increased by more than 50% from the prior year's quarter.
Interest Income has increased a lot already going from FY22, to FY23, and this trend continued in Q1’24. Lastly, we have to look at the “other revenues” which is Robinhood Gold, here we can see an increase of ~35%.

We also have to look at the operating expenses, and here we see a very healthy trend in Q1’24 across the board. Only marketing is up but as we know that the markets have been rallying, it’s a positive to see that Robinhood is trying to capitalize on it.
We must also look at the G&A expense where we see a decrease in costs of 80%. This is due to the cancelation of the founders’ reward program which saw enormous amounts of stock-based-compensation going towards Baiju Bhatt, and Vlad Tenev.

- Who are the competitors?

Schwab, more specifically TD Ameritrade, but this has been acquired by Schwab.
Robinhood has expressed the wish to overtake TD Ameritrade as the number 1 active trader platform, as Robinhood is currently number 2 in that category according to Tenev. TD Ameritrade has the benefit of being backed by a major bank, and has long been regarded as the go-to platform for active traders. Robinhood wants to disrupt it.

SoFi
SoFi Invest is directly competing with Robinhood, as well as that they both have a credit card for their members. The difference here is that SoFi is a bank. It’s a bank that operates as a FinTech, while Robinhood is a Fintech. Robinhood is a broker-dealer that is acquiring customers through that path whereas SoFi lures their customers in through the path of banking solutions.

- Are there company specific developments?

Robinhoods’ share price has been increasing recently, as they have been riding the wave of the crypto push. Why? The company is one of the most used crypto brokers which has resulted in a 57% increase in crypto holders, and an 88% increase in trade activity in accounts that hold assets for longer than a year. Analysts see this and have been selling the stock down, in my opinion, for that reason. Earnings were amazing but still the stock sold off after the latest earnings release.
Another reason for the sell-off may be due to an excessively high valuation, but we will go into this later to see if that argument stands.

- How do the valuation metrics look?

Starting with the current PE and F/PE. We have to keep in mind that at the moment of releasing this, Robinhood has seen an increase in share price of 15% due to what is happening at Gamestop and AMC. But as Robinhood has posted $0.14 of EPS over the past 4 quarters, the stock trades at a PE of 128. This is also due to just making the flip towards profitability but it’s quite extreme. If we look at the sum of the expected EPS of the next 4 quarters, we see that analysts expect a total of $0.49, this gives the stock a F/PE of 36, this is not too bad with the growth numbers we have seen from Robinhood.

When we look at the Free-Cash-Flow we can see that this is negative. We can see from the Cash Flow Statement that this is mostly due to securities segregated under federal and other regulations. This is cash set aside in order to avoid comingling with customer assets. But that never happens with brokerages now does it?

We could also look at ROIC, a metric loved by some investors. However as this company is just switching to being net profitable, it is not the best metric to look at, we will therefor skip this for now.

- Bull Arguments

Crypto - As Robinhood has pushed towards significant network effects, the customer base for its crypto broker is very large. This means that when crypto does well, Robinhood will experience a lot of additional trading revenue. This is also visible in the earnings reports and monthly activity reports.

Gold Membership - The Gold Membership is a great push for consistent income and wrapping customers into the platform. When we look at the value this membership offers, Robinhood users are crazy not to use it, only because of the 1% match on capital inflows already. As Tenev has said it during one of the latest earnings calls, the gold memberships are profitable as they want to make money on the customers within a year. ARPU from gold members is also multiples higher compared to non-gold customers.

IRA - Robinhood is setting up and receiving funds for their IRA offering. Tenev has said that they see very good inflows to that product which is very good as these funds will stay on the platform for a very long time.

- Bear Argument

Crypto - As I said crypto is a good opportunity for earnings, however, it is now looking to turn against the share price over fears of what will happen to the stock when this revenue stream drops out.

Type of investors - Robinhood used to be known for facilitating the simplest form of retail investors, the dumb money. However, this is changing over time as the company is quickly improving its offering and including the higher upstream individual investor.

Active Trader Platform - The company’s desktop app for the active trader is bad. Tenev has openly admitted that in an interview with Amit on YouTube. This for now is of course not a great thing when you want to catch up to TD Ameritrade, but Tenev has already said that he is working on it and that it will be improved.

- Conclusion

Robinhood is mostly known as the “dumb money” broker, but it works really hard to get rid of this stigma. And it is decently successful in doing so. What has happened over time is that Robinhood managed to create real network effects. The go-to broker for new retail investors has become Robinhood. They are taking market share at a rapid pace as Tenev has mentioned that in the last couple of quarters, they have seen net inflows in double-digit percentages from all competitors. They are also readjusting the company to be shareholder-friendly. This shines through in the cancelation of the founders’ share reward program. In the long run, it should be a benefit to Tenev and Bhatt as the share price multiplies many times over and commands higher multiples. 

It is a very positive sign to see the immense growth the company is having, but it also raises questions about sustainability, especially when looking at how the revenues stack up in the latest quarter. Transaction revenues beat massively, but this was almost entirely done because of crypto transactions as they increased 232%.
I view this as the reason why WallStreet has sold this stock off after earnings, when it initially peaked at $19.45, or even $19.70 in after-hours trading on immediate reaction to earnings. The share price dropped to $16.25 before getting pumped back up by GameStop and AMC traders. It had dropped about 20% in 2 trading days from its highs.

Transaction Based Revenues Q1’24

When we look at the Income Statements broken down per quarter going back to Q1’21, the point I try to make becomes even clearer. The company is pulling down its operating costs, but the sustainability of the rapid growth is questionable.

Supplemental Data given by Robinhood

When we think about a decent price for Robinhood, a couple of factors should be considered. (Please read the disclaimer below)
For one, what has been the average PS, if we look at the figure below by Macrotrends, we can see that the PS is relatively on the high side when compared to a historical average. The reason for using the PS here, and not the PE is because of the lack of historical profitability.

As we do not give certain buy points/prices, we give an area in which we believe the company might be getting into good value territory.
The way we look at this is by doing a very simple PE, or F/PE comparison to the S&P500. For this, we take into account that the S&P500 is trading at a 23PE on ‘24 EPS projections. By having done this analysis we believe that Robinhood can trade at a slight premium to the market. Therefore we believe that Robinhood will start to get into a fair-value range around a 26PE based on ‘24 EPS projections. The reason for believing this is an appropriate ‘24 PE is because of the strong network effects this company possesses and the growth it is seeing, but held slightly on the lower end due to a margin of safety for the risks of the business, namely the risk of earnings coming down.
As analysts expect Robinhood to post $0.50 of EPS, this brings us to a price of $13 where I believe the company to be around fair value. The stock is currently trading at a 38% premium to this number.

PS ration of Robinhood

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DISCLAIMER:

We do not give buy and sell recommendations, the value range range given is based on this reasonably simple analysis, but for you to have a good understanding of the business that you read about in this article, you will have to do your own analysis. The value range given in this article does not mean we will buy this stock at this price range, and in no way means you should.
Buying or selling a stock will always be your own decision and we are not liable for any decisions you make regarding this, it is also highly recommended to do further research into the company discussed in this article to get a better understanding of the business.