Robinhood, the retail dealer whose progress reached the stratosphere as stock trading boomed within the coronavirus pandemic, has fallen again to earth.
Active customers have fled the platform. The variety of funded accounts has levelled off. Robinhood’s market capitalisation has dropped by two-thirds because it went public final summer season. Last week it introduced lay-offs for almost 1 / 4 of its workers.
“It is a post-Covid hangover,” stated 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 dealer enticed a technology of first-time buyers with commission-free trading and an easy-to-use app. But its growth has hit a wall since authorities pandemic stimulus funds ended, inflation started to eat into buyers’ budgets and the stock market tumbled from its highs.
Robinhood’s enterprise has felt these challenges extra acutely than different brokers. Its income within the second quarter was down 44 per cent 12 months on 12 months, in comparison with an adjusted improve of 10 per cent at Interactive Brokers and a 13 per cent rise at Charles Schwab. Schwab additionally posted report earnings for the quarter.
After including 10mn accounts in 2021, Robinhood added solely 100,000 accounts within the second quarter. The variety of energetic merchants on its platform declined by virtually 2mn from the earlier quarter, to 14mn. A 12 months earlier than, energetic customers totalled 21.3mn.
Part of Robinhood’s drawback is demographic. The dealer attracted youthful clients who discovered themselves with money to take a position from their stimulus cheques. When the ultimate authorities funds went out in March 2021, the Robinhood Snacks e mail e-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,” stated Dolev, referencing the stimulus and the cryptocurrency.
But with inflation now ripping via the financial system, younger clients have confirmed essentially the most weak to monetary 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,” stated Richard Repetto, an analyst who follows brokers and exchanges at Piper Sandler.
A portion of Robinhood’s clients positioned bets on monetary know-how and crypto-related shares which were among the many largest decliners amid falling equity markets this 12 months. The publicity means they’ve been hit tougher than buyers with broader portfolios.
While Schwab’s reported buyer property dropped by 10 per cent within the second quarter in comparison with a 12 months earlier than, Robinhood’s property beneath 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 stated.
Robinhood has stated its competitiveness will rely upon bringing new merchandise to market. But “frustrating” inside paperwork has made it sluggish to launch issues reminiscent of retirement accounts, stated a workers member with direct data of the matter.
Staff have left as morale deteriorates. Before the most recent spherical of workforce cuts, Robinhood laid off 9 per cent of full-time staff in April. Since then an extra 5 per cent of workers have give up, in keeping with Robinhood figures.
The majority of Robinhood’s revenues are tied to the variety of transactions that happen on its platform. As trading has dropped off in unstable property reminiscent of cryptocurrencies, so too has this income stream.
In the second quarter of 2021, crypto trading accounted for half of Robinhood’s $451mn in transaction-based income. A 12 months later, crypto trading introduced in $58mn, accounting for simply 29 per cent of transaction income 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,” stated Tom Sosnoff, co-founder of choices 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 rate of interest rises by the Federal Reserve has given brokers an opportunity to earn curiosity and funding revenue on money stashed in buyer accounts.
But Robinhood is essentially lacking out on this profit. Account balances there common about $4,500, in comparison with $352,764 at Schwab. For each 0.25 share level fee improve, Robinhood stated it earns one other $40mn in curiosity income, whereas Schwab earns one other $350mn-$550mn, the brokers have stated.
Though Robinhood’s progress in customers made different brokers envious earlier within the pandemic, the corporate is focusing inwards.
“Historically Robinhood has been a company that has focused a lot on new customer acquisition,” co-founder and chief government Vlad Tenev stated final week. “This year will focus on the valuable customers we already have.”