The TRUTH About Robinhood

My thoughts about buying the hottest stock of the year - Robinhood.

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Andrei Jikh

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Today I wanted to talk about investing in the hottest stock offering of the year - Robinhood, the app for beginner investors went public yesterday, should you invest in it? Let me give you some good and bad about buying the stock.

THE GOOD:

1. Robinhood has over 18 million funded accounts with over 100 billion dollars of assets under management making them the third biggest broker in the world. In 2020 they grew their revenue from 277 million to 958 million which is a growth rate of 245%. And the first quarter of this year, their revenue is already 522 million which is up 309% over the same period of last year. And a 2020 Gallup poll says that roughly 68% of people between the age of 18 and 29 don’t have any money invested in the market so by this metric there’s definitely room to grow.

The downside to those numbers is that was when everyone was at home, they were bored so they got a lot of new customers which is not a sustainable growth rate under normal conditions.

2. Their public offering reserved more shares for retail investors than the average IPO. This is because when most companies go public, they will hire investment banks to sell their shares for them which means different banks will get different percents of the shares. After the big guys have taken their cut, the retail investors are served last - typically something like 10% of whatever is available.

This can sometimes drive the price artificially higher because of more competition amongst retail but also more manipulation from the bigger companies. Robinhood on the other hand decided to reserve more shares for the public, anywhere between 20% to 35% which is pretty big.

THE BAD:

The first downside future is growth potential. The average account value of Robinhood’s customers is $5,000 which is very little in comparison to something like Charles Schwab which has an average of $100,000 per customer.

This tell us that Robinhood’s average user is not necessarily the serious long term investor or they’re using Robinhood as their secondary broker with play money. This is bad for Robinhood because it corners their earnings potential. Their biggest competitors for example: Charles Schwab, TD Ameritrade, E-Trade, all of those big brokerages have diversified their income streams.

Robinhood makes roughly 80% of it’s revenue from something called payment for order flow which is controversial. Robinhood makes most of its money by routing our trades to market makers. Market makers like Citadel and Melvin Capital for example which are companies that don’t necessarily prioritize the interests of the clients of Robinhood.

This means that when we buy stocks on Robinhood, even though we don’t pay commission on those trades, we may also not necessarily always get the best price. Robinhood was forced to pay 65 million dollars in fines for not disclosing that. It is also why countries like the UK and Canada have banned making money from payment for order flow and their research found doing that gave investors better pricing for stocks in more than 90% of cases, up from 65%.

The risk is if our congress decides to regulate PFOF, it could wipe out up to 80% of Robinhood's revenue model. If Robinhood tries to compete with companies like Charles Schwab and tries to recreate those same income streams, there’s no guarantee that people would use any of those advanced products because their customers are not "sophisticated" investors with a ton of money. It could also potentially change the user interface which right now is their greatest asset.

MY THOUGHTS:

I did not buy the stock on IPO day but I’m tempted to buy it in the future because I think most of the negativity is already built into the stock price. Being a contrarian and doing the opposite of what most people are doing can pay dividends and be a smart decision, assuming you believe in the future growth potential of Robinhood.

*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.