Robinhood. Equity Research!
Understanding the Financial Super App!
Depending on who you talk to Robinhood is either a beloved stock trading app and a financial technology super app, or a gambling operator. With its innovative approach to stock trading and unique marketing, the company has attracted a whole new cohort of users to the stock market. However, disrupting the status quo doesn’t come without a few controversies.
By offering low fees and an easy-to-use mobile app Robinhood allowed millions of young and lower-income people to invest in the stock market. However, with bright colors and casino-like visualizations, the company has been accused of “gamifying” investing. Attracting young and impressionable people, many of whom lost their savings making imprudent decisions.
However, the company argues that by empowering millions of first-time investors the company is “Democratizing Finance” and helping people join the “American Dream” of capitalism.
Is Robinhood a gambling operator or a Financial Super App in the making?
Table of Contents
1. The Story of Robinhood
2. Business Model
3. Risks
4. Opportunities
5. Financial Analysis
6. Valuation
7. Conclusion
1. The Story of Robinhood
Robin Hood is a legendary British folklore hero who stole money from the rich and gave it to the poor. Now if you are confused as to how this name is appropriate for a stock trading app, you are not the only one.
The message is that Robinhood is always fighting for the little guy!
For decades stock investing was an activity that was difficult and expensive. To buy a share one needed to go through a broker, pay a few % fee, and wait a few days. As the technology evolved, the fees got lower, and processing times decreased. The fees decreased from a few % to a few 100 dollars, to 10s of dollars. However, this was not good enough for Robinhood founders. Vlad Tenev imagined a world with no fees and instantaneous stock trading available for everyone.
So, in 2013, Robinhood was founded.
“on the belief that everyone should be welcome to participate in our financial system. We are creating a modern financial services platform for everyone, regardless of their wealth, income, or background. Our mission is to democratize finance for all.” Robinhood 10K
Since then, Robinhood has expanded its value proposition and turned into a financial super app! Let’s look into Robinhood’s main products!
Brokerage
Brokerage was the first product that was offered by Robinhood, and the company is one of the pioneers of low-cost stock trading. Their brokerage platform allows customers to easily buy, sell, and lend shares, with no trading commissions.
One of the appeals of Robinhood is it allows fractional trading. The average Robinhood customer is younger and with a smaller portfolio. This causes a problem as shares of some companies can cost thousands of dollars, understandably some investors might lack funds to buy them. Fractional trading allows smaller investors to purchase less than a complete share, with $300 one can purchase 30% of a $1000 share. This enables customers to have diversified portfolios with just a few thousand dollars, without fractional shares it would require 10s of thousands of dollars.
An individual retirement account (IRA) is a tax-advantaged investment account available for US residents. Robinhood facilitates customer retirement planning by enabling them to easily and cheaply invest in securities.
For more sophisticated investors, Robinhood allows the trading of various derivatives. Another perk for more knowledgeable customers is trading on margin. Investors who feel confident about their investing strategy can use shares in their portfolio as collateral to borrow money from Robinhood. The size of the loan depends on the risk profile of the portfolio. For this service, Robinhood charges an interest rate. This can be a risky strategy as if the value of the collateral falls, Robinhood will liquidate it to pay off the loan. However, if the share price rises, the investor can make a significant profit in a short amount of time.
Additionally, the company has designed its platform to be a top destination for Crypto investors. Robinhood allows its customers to purchase most of the big cryptocurrencies such as Bitcoin, Ethereum, Dodge coin, USDC stablecoin, and others. The company functions as the custodian, holding the coins on behalf of their clients. Similarly to its brokerage, crypto customers can set up recurring purchases of coins for as little as $1.
Robinhood positions itself as a low-cost provider of various financial services!
Robinhood Gold
Robinhood Gold is a subscription service that as of April 2024 for $5 a month offers its users various perks, such as:
Lower margin rates – Gold members get a discount on the interest rate when margin trading. 12% is the standard rate charged, Gold members pay an 8% interest rate.
Morningstar research – Gold users have access to Morningstar’s extensive stock research.
Level 2 market data – Sophisticated investors can use live market data in various trading strategies.
Higher interest on cash – Gold members earn 5% interest on cash, whilst the standard rate is 1.5%.
Higher instant deposit – Depending on the size of one’s portfolio, Robinhood gold members can deposit up to $50,000 on their accounts instantly, without a fee.
1% Deposit match – US Customers receive 1% of their deposits if they keep the funds on the platform for 2 years!
3% IRA contribution match – US Customers depositing in their IRA accounts will get a 3% bonus on their deposit.
Gold Card – Robinhood offers a special gold credit card, with no annual fees and a 3% cashback.
2. Business Model
Historically a lot of the existing investing platforms targeted wealthier upper-middle-class investors. Robinhood saw a gap in the market, an untapped cohort of tech-savvy potential customers.