Robinhood, the retail brokerage whose growth reached the stratosphere as stock trading boomed during the coronavirus pandemic, has fallen back to earth.
Active users fled the platform. The number of funded accounts has stabilized. Robinhood’s market capitalization has fallen by two-thirds since its IPO last summer. Last week it announced layoffs for almost a quarter of its staff.
“It’s a post-Covid hangover,” said Dan Dolev, analyst at Mizuho Securities. Robinhood “woke up in a hotel in Las Vegas, and there’s a Bengal tiger in the bathroom.”
The California-based broker has attracted a generation of new 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 away at investors’ budgets and the stock market tumbled from its highs.
Robinhood’s business has felt these challenges more acutely than other brokers. Its second-quarter revenue was down 44% year-on-year, compared with an adjusted 10% increase at Interactive Brokers and a 13% rise at Charles Schwab. Schwab also posted record profits for the quarter.
After adding 10 million accounts in 2021, Robinhood only added 100,000 accounts in Q2. The number of active merchants on its platform fell by nearly 2 million from the previous quarter, to 14 million. A year ago, active users totaled 21.3 million.
Part of Robinhood’s problem is demographics. The broker attracted younger clients who found themselves with money to invest through their stimulus checks. When the final government payments were made in March 2021, Robinhood Snacks’ email newsletter headlined “Stimulus Landed”.
“They are moving towards the youngest, who have benefited from the ‘stimmy’. . . and who were spending it on dogecoin,” Dolev said, referring to the stimulus and the cryptocurrency.
But with inflation now plaguing the economy, young customers have proven to be the most vulnerable to financial shocks.
“Traditional investors investing for their retirement, they have retreated but have not disappeared. These low-income, less-sophisticated clients are the ones who just disappeared,” said Richard Repetto, an analyst who tracks brokers and exchanges at Piper Sandler.
A chunk of Robinhood customers have placed bets on fintech and crypto-related stocks that have been among the biggest decliners amid falling stock markets this year. The exposure means they have been hit harder than investors with larger portfolios.
While Schwab’s reported client assets fell 10% in the second quarter from a year earlier, Robinhood’s assets in custody fell 37%, from $102 billion to $64 billion.
“The young guys got crushed because they owned all the stocks that got crushed, the crypto stocks and the fintech stocks,” Repetto said.
Robinhood said its competitiveness will depend on bringing new products to market. But “frustrating” internal bureaucracy has slowed the launch of things such as retirement accounts, said a staff member with direct knowledge of the matter.
Staff left as morale deteriorated. Ahead of the latest round of workforce reductions, Robinhood laid off 9% of full-time workers in April. Since then, an additional 5% of staff have quit, according to Robinhood figures.
The majority of Robinhood’s revenue is tied to the number of transactions that take place on its platform. As trade has fallen in volatile assets such as cryptocurrencies, so has this stream of income.
In Q2 2021, crypto trading accounted for half of Robinhood’s $451 million in transaction-based revenue. A year later, crypto trading brought in $58 million, which is just 29% of the transaction revenue that totaled $202 million.
“Where did Robinhood generate this outlier growth and transaction volume? A lot of small crypto traders and a lot of small crypto exchanges,” 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 type of withdrawal as Robinhood is because crypto accounts for virtually none of our revenue, and virtually all of theirs.”
The interest rate hike by the Federal Reserve has given brokers a chance to earn interest and investment income on money hidden in client accounts.
But Robinhood largely misses this advantage. Account balances there average about $4,500, compared to $352,764 at Schwab. For every 0.25 percentage point rate increase, Robinhood said it earned an additional $40 million in interest income, while Schwab earned an additional $350 million to $550 million, brokers said.
Although Robinhood’s growing user base made other brokers jealous earlier in the pandemic, the company is focusing on the inside.
“Historically, Robinhood has been a company that has focused a lot on acquiring new customers,” co-founder and chief executive Vlad Tenev said last week. “This year we will focus on the valuable customers we already have.”