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.
Low Cost
Robinhood is a low-cost provider of financial services. The company doesn’t have account minimums, fees per stock, or ETF trades. Furthermore, services for which Robinhood does charge fees are very competitive. It might seem trivial to not charge fees for low account balances, but that hasn’t always been the case. Robinhood disrupted this industry and forced many of its competitors to implement similar measures.
Robinhood understood that it is very difficult to convince people to change platforms. As the new entrant in this industry, Robinhood had to find a way to differentiate itself. People are creatures of habit and relationships. Banks and legacy brokerages over many decades have built large and sophisticated operations. Moreover, let’s not forget that these organizations have way more resources than Robinhood.
“The majority of our competitors have longer operating histories and greater capital resources than we have and offer a wider range of products and services.” Robinhood 10K
Robinhood realized that it is easier to convince people who don’t invest to start investing than to steal customers from rival platforms!
By making their platform as cheap as possible, Robinhood removed the barriers to entry for new investors. In 2020, 40% of Robinhood’s users identified themselves as first-time investors and 53% of them were in their 20s or younger. Furthermore, 47% of customers were people of color and 43% had high school education or less.
The traditional legacy institutions had no desire to service this cohort. Their investment account balances were low, they were unlikely to use other services such as accountants, lawyers, and advisors. However, Robinhood believes that with time, this cohort of users is likely to grow their assets significantly. As they move up the career ladder and get higher-paying jobs, these users are more likely to stay with Robinhood.
Ease of Use
From the get-go, Robinhood was determined to have their app be the easiest to use. The company has taken it so far that some people have accused it of being too easy to use. The app has an intuitive design and incredible functionality. When Robinhood started, the legacy incumbents were not known to have great user interfaces, that didn’t seem to matter to their target customer.
However, as we already established, Robinhood’s target customers are younger and more tech-savvy!
They are used to doing stuff on their phones and demand a better user experience. By creating a great app Robinhood aims to be the go-to app for this cohort of users. As of today, their app is the 17th most popular finance app on the Apple App Store, with a rating of 4.2/5 stars.
An easy-to-use platform with great tools available, no surprise it’s become quite popular with active traders. Active traders are investors who use various short-term trading strategies to buy and sell lots of shares. Any security that is purchased is quickly turned around and sold for a small profit. An individual trade might not be extremely profitable, but as some active traders do hundreds and thousands of trades a month, they can sum up to a significant profit.
Active traders are beneficial not only because they use other products, but also because they generate a lot of order flow for Robinhood to sell. Payment for order flow is one of Robinhood’s main revenue sources and will be explored further in this report.
Customer Acquisition
The company uses many channels to acquire new users with word of mouth being a big tool. The company hopes that happy customers will tell their friends and family about the app. By offering a free product, with a great and easy-to-use mobile app, the company wants to deliver a great user experience, and nothing drives word of mouth better than a great user experience.
Furthermore, as the average Robinhood user is a young man in their 20s, Robinhood has recently looked to sports sponsorships as a way to acquire more users. NBA is one of the most popular sports leagues in the world and compared to other big leagues such as the NFL, MLB, and Premier League, the average NBA viewer is younger. Seeing an opportunity, Robinhood signed a sponsorship agreement with Washington Wizards.
The company has become the official brokerage of the club and has its logo on the left side of the top of the uniform.
Another favorite strategy of Robinhood is its referral program. Customers can win a share if they invite a user to sign up. Once a new customer fulfills certain requirements like depositing funds, buying a stock, and others, both the referrer and referred are rewarded! Robinhood has gamified the referral program, to encourage people to invite all their friends and family.
The company achieved it by making the process interactive and the app visually stimulating. It might seem silly, but referral programs can be a quite effective and cost-efficient way of getting customers.
Referral programs create an artificial word of mouth, turning customers into Robinhood’s spokespeople!
People tend to trust their friends and family, even if they might have ulterior motives for the invitation. The key is to make the reward appealing enough to encaurage customers to share the invite, but not too expensive for it to cost more than a traditional marketing campaign.
As of Q4 2023, the company had 23.4 million funded accounts. The company experienced a period of hypergrowth, growing from 5M to 22M users in just 2 years. Since then, user growth has slowed down.
Robinhood Gold
For a lot of Robinhood customers, this subscription is a no-brainer and an absolute bargain. One would need to deposit just $6,000 a year to earn back the $60 yearly subscription fee.
An investor who deposits a few thousand dollars a year and uses the gold card for daily purchases could possibly earn thousands of dollars in benefits!
If you are wondering how Robinhood profits from this subscription, you are not the only one. The short answer is, they don’t, not directly. Robinhood Gold is a loss-making subscription, so why offer these great perks?
Similar to Amazon Prime, the goal of the subscription is to provide such incredible value that customers don’t even think twice about signing up for it. By offering such an extensive subscription, Robinhood wants to lock customers in its ecosystem. Once customers become members, they are more likely to use various other Robinhood services.
Robinhood Gold serves as a customer acquisition and churn reduction tool!
The perks are designed to be easily marketed to investors, attracting them to the platform. Instant deposits remove the barrier for entry, if one must wait 2 days for funds to be available, one might reconsider depositing. Investing is not easy and comes with the risk of losing capital. Deposit bonuses create the feeling of gain on day one, making it easier to stomach a higher than maybe originally planned deposit. The Gold Card appeals to those who like status and luxury, giving them the allure and the prestige that comes with it.
The objective of lower margin rates, Morningstar, level 2 data, is to keep the customer from leaving. People are creatures of habit. If an investor builds their strategy using these tools, they are less likely to switch platforms, as they don’t want to lose what they are used to using.
High deposit matching makes it seem that the customer must pay to use other platforms!
In the minds of customers, the deposit match is already theirs, changing platforms would mean PAYING to leave.
Cross-sell
Robinhood constantly innovates and adds extra services to its platform. The company started as a simple brokerage but now offers a whole suite of products.
It’s cheaper to sell to an existing customer than to acquire a new one!
“We aim to serve our customers with existing product offerings, grow with our customers over time as they build their wealth, and create new and innovative products that are relevant to new and existing customers.” Robinhood 10K
Once customers are in the Robinhood ecosystem, they use more of their services. Robinhood attracts young college kids to the platform who invest a few hundred dollars. Unfortunately, life forces these kids to grow up and become real adults with jobs and responsibilities. Jobs come with higher incomes and as they already have a Robinhood account, they are more likely to increase the usage of Robinhood’s services. A customer might get a debit or credit card. Some responsible young adults might even open a retirement account.
Robinhood calls it increasing wallet share!
Wallet share is the share of the customer’s income that ends up on their platform, the company wants to consistently increase the usage of its service by existing customers.
In the above process flow, I illustrate how Robinhood increases its wallet share. No two customers are the same. People are in different situations in their lives, consequently, different value propositions “trigger” different customers to join the platform. However, that doesn’t mean that customers will only use the product that “triggered” them to join. In life, there are known unknowns and unknown unknowns.
Simply put, customers often don’t know what they want!
If through its marketing Robinhood persuades a customer to try crypto trading, once in their ecosystem, Robinhood hopes said customer will buy a few shares, open a retirement account, or get a credit card. Simultaneously, each subsequent new product attracts new customers. A customer who joins to get the gold credit card is likely to use other services.
With each new product, Robinhood moves up the ladder in the customer hierarchy of preferences!
Payment for Order Flow
Payment for order flow (PFOF) is how Robinhood generates a significant portion of its revenues.
PFOF is a process in which Robinhood sells its customer orders to market makers!
Market makers are businesses that trade large quantities of securities in order to benefit from the bid and ask spread. The process is quite different from an investment fund. Investment funds usually follow some kind of strategy and buy securities to hold them for longer periods of time, sometimes for many years. Market makers buy all securities, the underlying fundamentals are irrelevant, as the spread is the only thing that matters.
Market maker engages in instantaneous trades, for example, it buys security A for $100.00 and sells it instantaneously for $100.30. A 30-cent spread might not seem like much, however, as they facilitate billions of dollars of trades each day, it adds up. Citadel, one of the world’s largest market makers, made an estimated $7.5B in revenue in 2022. By offering this service, market makers provide liquidity to the market and support a seamless trading environment. Without market makers, security markets would be more volatile, and investors would have to wait longer to settle trades.
There are many market makers, and they constantly compete by offering different spreads. Some market makers have made agreements with Robinhood to manage their trading flow. For routing customer trades through a market maker Robinhood receives a percentage of the spread.
Market makers are essentially buying revenue!
They are paying Robinhood for the privilege of handling a customer’s trade and for each trade they earn a spread.
This practice is quite controversial and is banned in many countries, such as the EU, and the UK. The issue is that Robinhood is incentivized to route orders through market makers that pay the most, not the ones that offer the most favorable share price. This creates a conflict of interest where the interests of Robinhood and its customers are misaligned. Customers want to sell securities for the highest possible price and buy for the lowest.
Regulators are worried that retail investors could be lured in with promises of free trading, for Robinhood and other brokers to short-change them on execution. Robinhood says that it always offers the best available execution and never routes trades to an inferior offer for a fee.
3. Risks
As a relatively new company operating in a very difficult and competitive industry, Robinhood must protect its clients and operations. Let’s look at possible risks to Robinhood’s business.
Regulation
As mentioned in the PFOF section, this practice is controversial. EU and UK have banned it, while other jurisdictions have placed various restrictions. There are politicians who have openly supported changes to the law that would ban this practice in the US. 40% of Robinhood revenue in 2023 came from PFOF, if new regulations limit PFOF, Robinhood could be adversely affected. However, If the practice is banned outright, the whole business model of the company would require a complete redesign. PFOF provides a steady and predictable revenue stream allowing Robinhood to offer various other services below their true cost. Robinhood would have to change the pricing structures of most of its products, likely resulting in decreasing customer numbers, shrinking assets under consignment (AUC), and lower ARPU.
Apart from PFOF, new regulations relating to margin, option, and crypto trading could also negatively affect Robinhood business model. Tighter margin requirements or any other limitations would decrease the share of investors using margin when trading, reducing Robinhood’s interest income. Any new regulations in the crypto market could limit Robinhood’s ability to service this industry, thus lowering ARPU.
International regulation could slow down Robinhood’s potential expansion. A significant share of the potential future returns of Robinhood could not materialize if the company is unable to adapt to different regulatory environments in the EU, UK, and other potential markets.
Cyber Risk
As a financial institution that manages a lot of data, Robinhood must take cyber risk seriously. If their systems are penetrated by bad actors, the private data of millions of clients could be compromised.
The company disclosed that in 2020 approximately 2,000 accounts were accessed by hackers. Robinhood claims that their systems were not compromised, rather this was the result of hackers stealing user passwords from their personal devices. Even if a breach occurs because of a customer mistake, it’s their duty to protect the assets of their customers. Negative media attention and angry customers could lead to a damaged reputation and lost customers.
Brand Risk
It takes years to earn a reputation and only 1 incident to destroy it. Robinhood brand was significantly damaged during the Game Stop saga. At the peak of the mania, Robinhood stopped users from buying new shares, while allowing sales. Robinhood said that due to increased volatility, the action was taken to protect the company from increased collateral requirements from the clearing house. Whether factual or not, the perception at the time was that Robinhood purposely stifled the rise in GameStop stock to protect large Wall Street investors, who pay Robinhood for their order flow.
Even though multiple court cases and government investigations didn’t find any wrongdoing, the brand of Robinhood suffered. There are still some people today who, because of this scandal refuse to use Robinhood services. While broadly it seems that the company has recovered, this instance shows that Robinhood must protect its brand image, and try to avoid similar scandals in the future.
Cyclicality
Robinhood business is currently dependent on the cyclicality of the stock market. This was clearly visible during 2022 when AUC and revenues fell by 25% and 36% respectively. Meanwhile, the stock market recovery of 2023 came with a 37% increase in revenue and 65% growth in AUC.
The risk of cyclicality is twofold. On one hand, Robinhood must prepare for the eventuality of a falling stock market. Bear markets reduce trading volumes and overall investor enthusiasm. Moreover, during high market volatility, investors often increase savings. Increased savings means people allocate less income towards investments. Another factor to consider is that falling stock prices trigger margin calls, causing forced stock liquidations if investors can’t put up more collateral.
The convergence of these elements leads to reduced revenue and profitability!
Thus, it is crucial for the long-term survival of Robinhood that the company has ample reserves to survive prolonged periods of decreased activity.
On the other hand, if Robinhood is too conservative, its growth could be dampened. The more capital Robinhood preserves to survive a downturn, the less it has to reinvest in its business. As of December 2023, the company had around $11B of cash and short-term investments. Let’s assume for a second that Robinhood is wrong in the assessment of their needs, and they actually would need half of that. That would leave around $5B that could be reinvested back into the business, to build new products or acquire new customers.
Robinhood must do a precise balancing act of having enough reserves for a downturn, whilst reinvesting funds into growth!
Competition
Robinhood operates in the financial services industry. While the industry has a reputation for being quite profitable, it is also extremely competitive. Financial services companies engage in cutthroat competition for customers as their lifetime value is much higher than in other industries.
“We seek to differentiate ourselves from competitors primarily through our vertically integrated, mobile-first platform and focus on accessibility, customer experience, and trust. We believe that our ability to innovate quickly further differentiates our platform from our competition. We believe we compete favorably across all key competitive factors and that we have developed a business model that is difficult to replicate.” Robinhood 2023 10K
As Robinhood enters new product categories, they continue to face off against a very wide range of competitors. Large legacy financial services providers such as JPMorgan, Bank of America, Morgan Stanley, Fidelity, and Charles Schwab. Smaller brokerages Webull, Public, M1 Finance, Interactive Brokers, and others. Crypto exchanges Coinbase, Crypto.com, and others. FinTechs such as Block, Revolut, Sofi, and Ally Invest.
Looking at AUM we see that Robinhood has a long way to go, to be anywhere near the top. JPMorgan has over $3T in AUM, while Robinhood has just around $100B. However, as the graph on the right shows us, the picture looks different if one looks at the number of brokerage accounts. Even though Bank of America has 15 times more AUM, Robinhood has 6 times more accounts.
This variance clearly illustrates how different the business models of Robinhood, and legacy operators are. Charles Schwab targets higher-income individuals, whilst Robinhood young people with lower incomes. This strategy has been quite great at attracting new users, however, the consequence is low AUM per customer and lower ARPU.
For Robinhood to improve profitability, the company must continue to increase AUM and ARPU. The company hopes that it will bridge some of the gap with its competitors by adding new services. Furthermore, I believe the recent additions to Robinhood Gold, especially the credit card, indicate that the company is trying to lure higher-income individuals to its platform.
4. Opportunities
Let us look at what opportunities Robinhood could execute on!
Increasing Wallet Share
As previously mentioned, the average Robinhood customer is younger and less affluent. In 2023 the average assets under consignment (AUC) per account were $4,384.62. As explored in the competition section, this is significantly below other industry players.
There is a significant opportunity for AUC expansion!
Robinhood first went after the lowest fruits on the tree, the ignored and underserved. Now that Robinhood has signed lots of new users, the company is focused on going up the value chain. Offering more and more higher margin services. With new services on offer, customers will deposit more funds on the platform and AUC will expand.
“As our customers grow their wealth, we believe they will continue to expand their relationship with our platform, providing an increased opportunity to meet their growing financial needs. We believe that these needs may come in a number of forms, from helping new investors grow into long-term investors to providing other financial services such as saving, spending, or facilitating payments.” Robinhood 10K
Furthermore, the core demographic of Robinhood, millennials and Gen Z are rapidly ascending in their careers, with more disposable incomes to invest. Moreover, as boomers retire and die, millennials are on the cusp of one of the largest wealth transfers in history as trillions of dollars will be inherited. Robinhood has solidified itself as one of the favorite investing apps for this cohort.
If Robinhood can keep its existing users as they become wealthier, the company could significantly increase its AUC in the next decade!
Lending
There are many fintech trying to disrupt the lending space. Historically many legacy banks have provided a terrible customer experience. Many of them today still have tedious and slow lending procedures. If Robinhood could take its customer-first, user-experience-centric approach to lending, the company could steal market share from existing lenders.
If done correctly, lending can be an extremely profitable business. The company has some experience in lending with its margin product and the recently announced credit card. Expansion to other forms of lending could allow Robinhood to further monetize its existing user base and increase the ARPU.
Moreover, lending is an extremely large market. I presume that at any given time, millions of Robinhood users are paying back their car, student, and mortgage loans. If Robinhood can build a compelling user experience the company could issue lots of loans to their existing customers. Moreover, Robinhood doesn’t need to get a bank license and keep the liabilities on its balance sheet. The company can partner with existing lenders, and receive a commission for servicing the loans.
There is potential for these commissions to be high margin, as Robinhood wouldn’t have the risk of default on its balance sheet. However, by not having the risk of default, Robinhood would give away a significant chunk of the transaction economics.
Super App
Robinhood offers various trading features basically at cost. Now you are probably wondering, what is the objective of this?
The objective is to keep customers on their platform, so they spend money on other products!
A lot of companies use a similar strategy. Restaurants often sell food at a loss and make up for it with drinks. In reverse to that, grocery stores have small markups on beer and large markups on snacks. A business builds its operating model with a certain sales funnel in mind. Now the trick is to design a sales strategy that converts and pushes customers towards the higher value services. For restaurants, drinks are the profit drivers, while for Robinhood it’s lending!
In the picture above I made a simple illustration of Robinhood’s sales funnel. At the top of the funnel, we see brokerage that attracts customers to Robinhood’s platform. The next step is to build compelling new services and push a share of existing customers down the funnel. Offering investors loans to invest on margin generates interest income. Credit Card and any new products that Robinhood creates also generate income.
Robinhood is combining a high-frequency, low-margin product with a low-frequency and high-margin product!
There is potential for such a strategy to be extremely profitable. The more services Robinhood builds the lower the customer acquisition cost for each service. This is the advantage of a “Super App”. A financial services super app is an app that aggregates dozens or even hundreds of different services, into a single cohesive platform. Furthermore, it’s not required of Robinhood to build all the services themselves, the company can partner with existing providers and integrate their services into Robinhood’s app and share the economics of the transaction. Robinhood benefits by not having to do all the heavy lifting like regulations and product development. Whilst potential partners benefit by having an opportunity to monetize Robinhood customers.
The ultimate goal of a super app is convenience!
Any ancillary services that Robinhood adds don’t necessarily have to be the cheapest. For example, by making it incredibly easy for customers to buy insurance with just one click, the super app hopes that customers won’t double-check prices for alternatives. Robinhood is still in the early building phase of its super app, so the priority is growing users, not profitability. This is why the perks of Robinhood Gold are so appealing. For a small monthly price of $5, customers receive incredible value.
However, once Robinhood is satisfied with the number of users they have, the company is likely to move towards improving profitability!
Robinhood will significantly improve profitability by eventually raising prices for Robinhood Gold. Furthermore, with massive scale, Robinhood customers will make the company incredibly attractive for potential partners. This will allow Robinhood to get better terms from them.
A few services that I think Robinhood will build that could potentially increase the stickiness of their platform:
Insurance – Car, home, life, and accident insurance markets are worth many $ trillions. By partnering up with existing reinsurance companies Robinhood can earn high-margin commissions while offloading the insurance risk to the partner.
Leading – Similarly as with insurance, Robinhood is likely to partner with various existing providers and earn commissions for facilitating car, mortgage, and other loans.
Travel Services – Robinhood could partner up with various platforms to offer car rental, hotel, and flight booking.
Business Services – Robinhood is currently retail-focused, by adding more services geared towards business the company can expand its target market.
A customer who has its investments on Robinhood is likely to trust Robinhood with other services!
International Expansion
Robinhood brand has historically been known to bring investing to first-time investors and the company has been extremely successful at that in the United States. According to the Pew Research Center, in 2020 more than half of US households had some kind of investment in the stock market, about half of that is people who hold stocks directly, and the other half have just retirement accounts.
US equity markets are quite popular, even for regular citizens. This is in stark contrast to other countries. In the UK direct retail participation in equity markets has decreased from 23% in 2003 to 11 in 2022%. In Germany and Poland, the participation rate is also around 10%.
Robinhood could significantly increase household participation in equity markets!
The company has started its international expansion in the UK. The company launched its brokerage product in late 2023, offering a commission-free, no-account minimums platform. The company is determined to achieve similar user growth as it had in the US.
“From our founding in 2013 to 2022, the U.S. experienced a 27% increase in the average amount of financial assets each household holds in equities. During this same period, the UK experienced a less than 1% increase.**** We see an opportunity to spark a similar shift, just like we did in the U.S. for our more than 23 million customers.” Robinhood Press Release
Furthermore, Robinhood has started offering crypto brokerage in the rest of the EU. The regulatory environment determines Robinhood’s expansion pace and schedule. It will take some time for the company to do the legal groundwork to offer a full brokerage in the EU.
Currently, 6.85% of the US population has an account on Robinhood. If Robinhood can expand to the EU and UK successfully and increase market participation to the same degree as in the US.
There is potential to gain 35 million customers!
Gaining 35 million customers would allow Robinhood to significantly increase AUM, thus increasing revenues and profitability. Moreover, international growth could lead to significantly increased margins, as activated economies of scale let Robinhood service more customers with the same resources.
Of course, it won’t be simple, and it’s not a guarantee that Robinhood will achieve the same market penetration as in the US. 35 million is not a forecast, just an illustration of the potential.
5. Financial Analysis
Customers
As of December 2023, Robinhood has 23.4 million of Net Cumulative Funded Accounts, and the average account size is $4,384.62.
From 2019 to 2021 the company experiences explosive growth in the number of accounts on its platform from 5 to 22.7 million, an increase of 345% in just 3 years. Since then, the growth has slowed down quite a bit, only increasing 3% in the next 2 years, adding 700K users.
The average account size is quite volatile, as it moves a lot depending on the market. From the 2020 peak, it fell 46% to $2,700 in 2022, however, it has since recovered, growing 62% in 2023.
In the graph above, we see how monthly active users have plateaued, at around 11 million users. Furthermore, the share of monthly active to total users has collapsed. In 2020 94% of Robinhood’s active accounts were also monthly active. During 2021 it fell to 32%, however, it has since recovered to 47%.
As a result of the current dynamics of Robinhood’s business model, revenue per user is quite volatile. It peaked in 2020 at $109, growing 66% Y/Y, by 2022 it had fallen to $60, down 45%. However, revenue per user now stands at $80 + 33% Y/Y.
This is type of volatility in revenue per user and monthly active accounts is understandable, as during the peak Bull Market mania of 2020 there was significant interest in the stock market, additionally, crypto mania was at an all-time high as well. Lots of people heard from their friends and the media that now is a good time to invest, so customers opened accounts en masse. However, as the stock and crypto markets started falling, so did people’s interest.
Robinhood has a reputation as a cheap place to buy and sell crypto and stocks. So, when people have an interest in stocks, they think of Robinhood, however, people’s interest vanes, they stop depositing funds. Robinhood hopes to increase the share of monthly active users and reduce the volatility of revenue per user by adding new features. This is where Robinhood Gold, Credit Card and retirement plans come into play. The goal is to make the Robinhood platform stickier and drive increased platform activity, even during market downturns.
Asset Composition
As of December 2023, Robinhood held $69.4B of equities, $14.7B crypto, $0.6B options, and $21.3B of cash on behalf of its customers. Including $3.4B of customer receivables the total Assets Under Custody (AUC) were $102.6B. In 2019, Robinhood held $16.1B of AUC.
Since 2019, AUC has grown by 548%, CAGR of 60%!
In the above pie chart, we clearly see that 65% of Robinhood’s AUC is equities. Since 2019 the company has grown AUC from $11.7B to $69.4B, an increase of 492%. However, from the graph on the right side, we see that the growth has flatlined. Largely due to the stock market slowdown of 2022. Crypto assets constitute 14% of AUC and since 2019 have grown by 3,451% to $14.7B.
20% of AUC is cash, moreover, the position has increased considerably, 783%, reaching $21.3B. With a high APY offering, Robinhood has been focusing on luring in customer cash to its platform. I believe this strategy is twofold. Firstly, Robinhood wants more cash to benefit from high-interest rates. Secondly, Robinhood hopes that once customers deposit funds, instead of just leaving money in the high savings account, customers invest some of it, thus increasing trading volumes. I believe this is one of the reasons, why Robinhood offers higher APY than some of its competitors.
Robinhood is willing to earn a smaller spread on interest because it hopes the use of other services will counterweigh it!
Revenue
Robinhood finished 2023 with $1.865B in revenue an increase of 37.3% Y/Y.
However, as we can see in the graph above, Robinhood’s growth hasn’t always been constant. As discussed in the previous chapter, Robinhood’s performance is somewhat cyclical, dependent on market cycles. However, if we zoom out, strong growth is clearly apparent.
In 2019, the revenues were $277.5M, since then Robinhood has grown with a CAGR of 61%.
Growth was especially impressive during the 2019-2021 Bull Market when in 2 years the company grew revenues by 554%. However, as the crypto and equity markets slowed down, Robinhood revenue fell 25% in 2022. By adding additional services discussed in the previous chapter, the company should continue growing while simultaneously decreasing uncertainty during market slowdowns.
Revenue Composition
In the above pie chart, we can see 2023 Robinhood’s revenue composition. Net interest revenue is the biggest contributor, with 50% of revenue. This is the revenue generated by customers using margin and other interest-bearing products, minus Robinhood’s interest expenses. With 27% of revenue, options is the second largest category. 10% of revenue comes from other, this category consists of Robinhood Gold subscription income and other fees.
Comparing the changes in revenue composition from 2019 to 2023, few trends can be observed.
Interest income share doubled from 26% to 50%! It grew from $70.6M to $929M, 12X in just 4 years. This was driven by higher interest rates. Interest on corporate cash went from essentially 0 to $288M.
Option share decreased from 40% to 27%. This was despite option revenue growing by 356%, from $111M to $505M.
Equity share decreased from 18% to 6%. Alike to option revenue, equity revenue increased by 105%, from $51M to $104M.
Crypto share doubled from 3% to 7%. Pushed up by growth in the crypto industry, crypto revenues increased by 1,321%, from $9.5M to $135M.
The change in revenue composition shows Robinhood’s sales funnel at play!
Equities and options are at the top of the funnel, and the company has pushed customers down the funnel toward the more profitable products. Furthermore, we can start to see how the company aims to reduce the swings in its revenue. While market activity went down in 2022, rising interest rates drove interest income to new highs. If FED lowers interest rates, trading volumes and margin trading are likely to increase, thus increasing revenues. In the future I expect the Other category to be a bigger driver for revenue growth.
Profitability
Robinhood closed 2023 with losses of $541M, a Net Profit margin of -23%. Robinhood is not a mature company, and the company is spending heavily to grow its platform, so the losses are still significant. However, Robinhood’s losses have been decreasing both in absolute and relative terms.
Robinhood had its IPO in 2021, and as a result, the company incurred a massive $2B one-time expense related to share-based compensation and other related IPO expenses. Since then, the company has reduced losses by 85%.
Robinhood further uses adjusted EBITDA to track operating profitability. In 2023, Adj EBITDA was $536M up from -$90M of the prior year. Adj EBITDA excludes SBC and other non-cash, or one-time irregular expenses.
“The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, or because the amount and timing of these items is unpredictable, is not driven by core results of operations and renders comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as providing a useful measure for period-to-period comparisons of our business performance.” Robinhood S1 filing.
As per the above quote from Robinhood’s S1 filing, the company considers Adj EBITDA a good barometer of operational performance. Last year growth in the metric was at a record level. Indicating that with larger scale, the economics of Robinhood operations are improving.
The improving economics can be further seen in the graph above. Since 2019, Gross Margin grew from 71.4% to 83.6%, Adj EBITDA -26.7% to 28.7%, and Net Margin -38.4% to -29%.
Expense Structure
Robinhood extensively uses stock-based compensation (SBC) to reward its employees.
Last year the company spent $871M on SBC, that’s 46.7% of revenue!
While SBC as a share of revenue has been decreasing every year since the IPO, it is still very high, and this is a number that an investor should pay attention to. Ideally, I would want it to decrease faster. However, as the company pursues aggressive growth, it is likely to remain elevated.
Sales and general administrative expenses are still extremely high, $2.1B and above 100% of revenue. While SGA increased 10.4% Y/Y, the rise was below the revenue increase of 37.3%, indicating improving economies of scale. The downward trend of the past 2 years is encouraging, SGA reduced from 161% to 112% of revenue. As Robinhood grows, the company should significantly reduce this expense.
As Robinhood adds new customers it costs less to service each incremental customer.
One of the biggest drivers of SGA is the technology costs. Last year Robinhood spent around $805M or 43% of its revenue to maintain its tech. However, in the future, the share of tech expenses is likely to decrease. Many Robinhood products are already created, and it is significantly less expensive to maintain than to create them. Last year, the company reduced tech costs by 8.3%.
In the above graph, we clearly see how Robinhood is achieving marketing efficiencies. Throughout 2019-2021 Robinhood was building its brand, thus the company spent heavily on marketing. In 2019, Robinhood spent $125M, or 45% of revenue on marketing. Since then, the company has reduced marketing expenses in absolute and relative terms, spending $122M or 7% of revenue in 2023.
In its 2024 guidance, Robinhood indicated that its total operating expenses should decrease to $1.85B-$1.95B. The company is undergoing cost-cutting measures to reach profitability in 2024.
Balance Sheet and Cash Flow
Robinhood has a healthy balance sheet. As of the closing of 2023, the company had $10.9B in cash and short-term investments, and $3.7B in debt, resulting in a negative net debt position of $7.2B.
In the above graph we see that Robinhood has grown its balance sheet quite significantly during the last few years!
In 4 years, the company was able to increase its assets and liabilities by 720%, a CAGR of 69%
Robinhood’s cash flow is heavily skewed by SBC and investing activities. Similarly, as with banks, I believe that Free Cash flow is not a great metric to measure Robinhood’s performance. It is too volatile and doesn’t accurately capture the company’s ability to generate revenue from its core investment platform.
6. Valuation
As Robinhood is an unprofitable growth company, the standard P/E ratio can’t be used to assess current valuation. Robinhood’s current market cap is $15.6B and the stock is down 48% since IPO. It’s currently trading for 6 times 2026 analyst estimated sales.
To assess Robinhood’s potential return, I have built two valuation models a Base Case and a Bull Case model. In both models, I estimate potential US and international account count and ARPU in 2033 to get to the revenue. The next step is to estimate the potential net margin. A few factors are driving the assumptions.
Accounts
A huge portion of Robinhood’s value comes from its users. The company has grown incredibly quickly quadrupling its users in 4 years to reach 23.4M. However, as its business model matures, the company will likely find it harder to grow users. Thus, both models assume a slowdown in user growth.
Robinhood is aware of this dynamic, hence the recent expansion to the UK. In the next decade, Robinhood is likely to enter new markets such as the EU and Canada, and possibly APAC countries such as Australia, New Zealand, and India. Regulatory environments and Robinhood’s ability to successfully navigate them will largely determine how many users the company can get.
ARPU
As explained in the previous chapters, the business model of Robinhood results in a lower ARPU than competitors. Robinhood is trying to increase ARPU by expanding its suite of products. Thus, ARPU is likely to grow in the future, however, the growth depends on how effectively the company can cross-sell. Robinhood must add new financial products that help add new users while simultaneously increasing the uptake by existing users. As Robinhood executes its strategy, the company should increase US ARPU.
Meanwhile, international ARPU will be lower, due to different market dynamics, regulatory environments, and lower GDP per capita.
Profitability
Robinhood is currently a low-cost provider of brokerage services. Today that means low margins, however as the company matures and pushes customers down its sales funnel towards new and more profitable services, profitability should increase. Large financial services companies have net margins in the range of 20% to 30%. Factors that will determine if Robinhood can reach similar margins are a continued rise in users, cost discipline, larger economies of scale, marketing efficiencies, and the uptake of new offerings by existing customers.
Robinhood has demonstrated it can grow users, and the marketing and operating efficiencies have been improving. Furthermore, Robinhood cost discipline has been improving as well, with the company doing large layoffs and cutting expenses. Moreover, I believe it is likely that Robinhood will continue to improve its economics and achieve profitability similar to other financial services companies.
However, Robinhood has yet to prove it can drive existing customers to use new products. The company has had good success with its retirement products, the results of the newly released credit card will be an indication if Robinhood can replicate this in other categories.
Base Case
By 2033
35M US and Canada Accounts, a CAGR of 4%.
21M International accounts
$192 US ARPU, CAGR of 9%
$115 International ARPU, 60% of US ARPU
20% Net Margin
5% Yearly Dilution
In my base case, Robinhood significantly grows its US users reaching 35M accounts by 2033, this includes any potential users in Canada. Furthermore, the company increases its ARPU to $192, driven by attracting new wealthier clients, developing new capabilities and servicing increased incomes of existing users.
I estimate that international accounts could grow to around 21M. Currently, 6.85% of US population has a Robinhood account, if the company can get to 60% of that level in EU+UK, they would get to the mentioned 21M level. However, as the GDP per capita of EU+UK is around 60% of that of the US, I assume that ARPU will be 60% of US ARPU.
If these estimates were to come true, in 2033 Robinhood would have revenues of $9.1B and net profit of $1.8B.
A P/E of 30 would result in a market cap of $53.8B, a 118% upside from today’s levels, 8.1% CAGR!
However, as the P/E is fundamentally determined by future growth assumptions, if the market deems them lower, the upside can be severely limited.
Bull Case
By 2033
40M US and Canada, Accounts, a CAGR of 5.5%.
30M International accounts
$248 US ARPU, CAGR of 12%
$149 International ARPU, 60% of US ARPU
25% Net Margin
3% Yearly Dilution
In the Bull Case US and Canada accounts are 5M larger and reach 40M. Driven by lower churn and better ability to continue attracting new investors. International accounts are 9M higher than in the base case, reaching 30M. The company expands to more countries and is able to get closer to the current US penetration.
ARPU is approximately 30% higher, as Robinhood develops more products and their uptake by existing users is higher than in the base case. Increased economies of scale allow Robinhood to improve Net Margin to 25%. Dilution decreases to 3%.
If the assumptions in the Bull Case came to fruition, in 2033 Robinhood would have $14.4B in revenue and a net profit of $3.6B.
A P/E of 20, would result in a market cap of $71.2B, a 250% upside from today, a CAGR of 13.4%!
Conclusion
Robinhood is quite an interesting young company. With innovative products and a unique market positioning, the company has been able to grow unbelievably fast. With 23.4M users, the company is one of the most popular investing apps in the US onboarding millions of first-time investors!
However, the company is not perfect! PFOF is a controversial practice, 40% of its revenues are generated by it. If the practice is banned the company would have to reinvent itself! The ARPU and AUC are significantly below their peers. Moreover, the company is highly dilutive, with massive SBC costs.
Nevertheless, I find Robinhood to be an attractive investment!
I believe the company has demonstrated a great understanding of behavioral psychology. Its marketing strategy and app are created to drive maximum engagement. In my opinion, the Gold subscription will be a massive winner. Robinhood is creating an extremely powerful vacuum to drive people to its platform. Once a customer has been acquired, the company will use its great platform and the Robinhood Gold subscription as a super glue, reducing churn and increasing ARPU!
There is significant potential for ARPU and international user growth!
As Robinhood has demonstrated in the US, if correctly targeted young and less affluent people can be convinced to participate in the capital markets. In countries such as UK, Germany, and Poland market participation is much lower than in the US.
While the valuation is not cheap, 6 times 2026 analysts estimated sales, I believe as the Base and Bull case valuation models demonstrated, there is significant upside potential. If the company successfully grows users and increases ARPU, they should do really well in the next decade!
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Disclaimer: Global Equity Briefing by Ray Myers
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