Robinhood, the retail broker whose growth reached the stratosphere as stock trading boomed in the coronavirus pandemic, has fallen back to earth.
Active users have fled the platform. The number of funded accounts has levelled off. Robinhood’s market capitalisation has dropped by two-thirds since it went public last summer. Last week it announced lay-offs for nearly a quarter of its staff.
“It is a post-Covid hangover,” said Dan Dolev, analyst at Mizuho Securities. Robinhood “has woken up in a hotel in Las Vegas, and there is a Bengal tiger in the bathroom”.
The California-based broker enticed a generation of first-time investors with commission-free trading and an easy-to-use app. But its expansion has hit a wall since government pandemic stimulus payments ended, inflation began to eat into investors’ budgets and the stock market tumbled from its highs.
Robinhood’s business has felt these challenges more acutely than other brokers. Its revenue in the second quarter was down 44 per cent year on year, compared to an adjusted increase of 10 per cent at Interactive Brokers and a 13 per cent rise at Charles Schwab. Schwab also posted record profits for the quarter.
After adding 10mn accounts in 2021, Robinhood added only 100,000 accounts in the second quarter. The number of active traders on its platform declined by almost 2mn from the previous quarter, to 14mn. A year before, active users totalled 21.3mn.
Part of Robinhood’s problem is demographic. The broker attracted younger customers who found themselves with cash to invest from their stimulus cheques. When the final government payments went out in March 2021, the Robinhood Snacks email newsletter ran the headline, “The Stimulus Has Landed”.
“They steer towards the youngest people, who benefited from ‘stimmy’ . . . and who were spending it on dogecoin,” said Dolev, referencing the stimulus and the cryptocurrency.
But with inflation now ripping through the economy, young customers have proven the most vulnerable to financial shocks.
“Traditional investors investing for retirement, they’ve pulled back but haven’t disappeared. Those lower income, less sophisticated customers are the ones that have just gone away,” said Richard Repetto, an analyst who follows brokers and exchanges at Piper Sandler.
A portion of Robinhood’s customers placed bets on financial technology and crypto-related stocks that have been among the biggest decliners amid falling equity markets this year. The exposure means they have been hit harder than investors with broader portfolios.
While Schwab’s reported customer assets dropped by 10 per cent in the second quarter compared to a year before, Robinhood’s assets under custody dropped by 37 per cent, from $102bn to $64bn.
“The young guys got crushed because they were holding all the stocks that got crushed, the crypto stocks and the fintech stocks,” Repetto said.
Robinhood has said its competitiveness will depend on bringing new products to market. But “frustrating” internal bureaucracy has made it slow to launch things such as retirement accounts, said a staff member with direct knowledge of the matter.
Staff have left as morale deteriorates. Before the latest round of workforce cuts, Robinhood laid off 9 per cent of full-time workers in April. Since then a further 5 per cent of staff have quit, according to Robinhood figures.
The majority of Robinhood’s revenues are tied to the number of transactions that take place on its platform. As trading has dropped off in volatile assets such as cryptocurrencies, so too has this revenue stream.
In the second quarter of 2021, crypto trading accounted for half of Robinhood’s $451mn in transaction-based revenue. A year later, crypto trading brought in $58mn, accounting for just 29 per cent of transaction revenue that totalled $202mn.
“Where did Robinhood generate this outlier growth and trading volume? A lot of small crypto traders and a lot of small crypto trades,” said Tom Sosnoff, co-founder of options trading platform Tastyworks. “The reason online brokers like Tasty, Interactive Brokers, Fidelity and Schwab haven’t had the same kind of drawdown as Robinhood is that crypto is virtually none of our revenue, and virtually all of theirs.”
The interest rate rises by the Federal Reserve has given brokers a chance to earn interest and investment income on money stashed in customer accounts.
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But Robinhood is largely missing out on this benefit. Account balances there average about $4,500, compared to $352,764 at Schwab. For every 0.25 percentage point rate increase, Robinhood said it earns another $40mn in interest revenue, while Schwab earns another $350mn-$550mn, the brokers have said.
Though Robinhood’s growth in users made other brokers envious earlier in the pandemic, the company is focusing inwards.
“Historically Robinhood has been a company that has focused a lot on new customer acquisition,” co-founder and chief executive Vlad Tenev said last week. “This year will focus on the valuable customers we already have.”
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