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Last May, Robinhood said it had more than 13 million account holders. This figure has probably grown significantly in recent months.
Tiffany Hagler-Geard / Bloomberg
The Super Bowl ad that Robinhood airs this weekend doesn’t talk much about stocks, and maybe it’s better.
The increase in stock trading by retail investors has put the investment application in the spotlight and is likely to remain there for several months. In the coming weeks, the company’s CEO, Vlad Tenev, will have to testify before Congress, and then, perhaps as soon as the second quarter occurs, Robinhood is expected to go public. The initial public offering process will highlight Robinhood’s huge growth, but also the significant risks they face in trying to overturn decades of Wall Street rules.
Robinhood, founded in 2013, has gone from being a startup to a central player in broker wars and is now an important part of the plumbing of the American financial system. Its core innovation (trade without commissions) has realigned the industry and helped attract millions of new Americans to invest in stocks.
The Robinhood platform became the central battleground where retailers took to Wall Street during the GameStop frenzy (ticker: GME) late last month. But the company hesitated at a key moment, banning the purchase of
GameStop,
AMC Entertainment
(AMC) and other stocks in the same way that retail investors rushed into.
Other brokers also imposed restrictions, but most continued to allow securities trading. Robinhood said he was suddenly forced to put in more capital (up to ten times normal levels), with his clearinghouse as protection and could not allow the high trading volume to continue. on your platform. The firm finally eased those restrictions and lifted them completely on Friday. But not before GameStop lost 85% of its value, a move some investors blamed for Robinhood restrictions.
Robinhood declined to comment or make available to Tenev to discuss the IPO, its financial statistics or the company’s criticisms. In blog posts, the company has dispelled rumors of anything ominous about trade limits, showing that the volume was “magnitudes above the norm.”
Robinhood has not released recent figures on the size of its customer base, but last May, the company said it had more than 13 million account holders. Now it probably has somewhere north of 15 million. Data from web analytics company SimilarWeb shows that the Robinhood app was downloaded more than a million times in just two days to match the GameStop frenzy, many times more than the competition. It is bridging the gap with the industry leader
Charles Schwab
(SCHW), which had about 30 million active accounts at the end of the fourth quarter.
Still, math is not in favor of Robinhood. While Robinhood is the growth leader, its customers have tended to have much smaller balances than those of rival brokers, and some estimate that their average account size is less than $ 5,000. Customers from some of the larger competitors typically have more than $ 100,000.
Robinhood does not publish income or profit numbers, but stock presentations offer some advice. The company relies heavily on what is known as order flow payment, which means that Robinhood gets some of the money that market makers store from the difference between supply prices and asset demand. they market. In 2020, Robinhood earned $ 687 million by paying for the flow of orders in stocks and options transactions. (He also makes money in the crypto trade, though his presentations do not reveal these figures.) CFRA analyst Pauline Bell estimates that approximately 80% of Robinhood’s revenue comes from paying for order flow, which would mean the company had about $ 1 billion in revenue by 2020. Analysts say they suspect the company is unprofitable.
Robinhood’s latest traditional round of private fundraising valued the company at $ 11.7 billion. Analysts think the company could go public for more than $ 13 billion
Morgan Stanley
(EM) paid to buy E * Trade last year.
To achieve this valuation, Robinhood will likely need to convince investors that its revenue stream is safe and consistent. However, payment for the order flow has been subject to control. In December, Robinhood was forced by the Securities and Exchange Commission to pay $ 65 million to resolve claims that misled customers about how it made money, even though it did not get the best execution for them. The company did not acknowledge any fault. He said he has changed practices. Other brokers also make money by paying for order flow, with the exception of Fidelity, but it is generally a much smaller percentage of their income.
ClearBridge Investments analyst Miguel del Gallego, who covers financial companies, believes payment for order flow could see regulatory changes, although he expects general practice to continue.
Options trading, which can carry much greater risks than traditional stock trading, is also likely to be examined further. Robinhood earned nearly two-thirds of its revenue from payment by order of options in the fourth quarter, meaning it could face excessive risk from any regulatory change.
Robinhood’s business model has often raised questions about its alignment with customers. “It can be argued that their real end customers are those high frequency operators who actually take this information and trade against what are known as uninformed investors,” Gallego said.
Now the company is facing a backlash on social media. Some retailers have grouped the company with contemptuous Wall Street bigwigs. In an interview on Reddit, billionaire Mark Cuban wrote that Robinhood “disappointed you greatly” and suggested to merchants that they find a “broker with TRILLIONS of dollars in assets on their balance sheet.”
A survey of about 10,000 investors on the social network StockTwits showed that 40% of them planned to change agents and that most of those who planned to change were Robinhood customers. Competitors are not lying down. Schwab is successful in attracting younger customers, with approximately half of its new customers under the age of 41. Most new customers are signing up for trading tools that help them create self-directed accounts, according to the firm, from 20% in 2016, a sign that Schwab is attracting a newly enthralled generation of merchants who don’t settle for “setting up lo and forget it ”with their accounts.
Robinhood faces another potential risk once it goes public: as one person wrote on Reddit last week: “I can’t wait for Robinhood in Robinhood.”
Write to Notice Salzman to [email protected]