What happened to Robinhood Markets (NASDAQ:HOOD)

Robinhood Markets (NASDAQ:HOOD) may well end up remembered as one of the stocks of the 2020s. It was one of the highlights, or lowlights for many, of both 2020 and 2021, shooting to prominence with its high-frequency, uber-popular zero-commission trading platform.

Consumers trapped at home and flush with cash during the pandemic, unable to work or even watch their favourite sports, turned to speculating on the equity market. It was one of the most powerful trends in recent history, with the start-up fintech seemingly growing overnight to have a user base of 22 million paid-up clients.

So, what happened to Robinhood?

Named after the legendary outlaw and sometimes hero, Robinhood’s focus was on bringing wealth to the masses; and boy, was it good at it. The firm effectively pioneered the zero-fee trading story which has expanded all over the world, but most importantly, it succeeded in something that old-fashioned brokerage houses never could get right; the user experience, or UX.

The platform was able to “gamify” the trading of stocks, options and even cryptocurrencies to such an extent that it became part of the zeitgeist, for millennials at least. The massive surge in users and revenue saw the company file for an IPO in August 2021, getting a valuation exceeding US$30 billion.

One of the most powerful drivers of Robinhood’s success was its ability to sell the order flow of its 22 million users to market-makers, including the giant Citadel Securities, who would pay them for the opportunity. This provides an important source of data for brokerage firms and hedge funds, and a base on which the company could continue to expand; in fact as much as 80 per cent of revenue came from this source.

The approach, known as Payment for Order Flow, has since been challenged by the US regulator, and is likely to be a falling portion of revenue in the future. Amid the second year of the pandemic, the company pivoted away from meme-stocks like AMC and GameStop, and harnessed the massive demand for Doge Coin and similar speculative cryptocurrencies, to the point where trading in them became a major source of revenue; albeit fluctuating significantly.

In this way, the company may well have become the epitome of “momentum,” the powerful trend of investors seeking to buy investments that have previously gone up, perpetuating a continuing cycle of gains. The issue with momentum, of course, is that it allows companies and assets to become overvalued and at risk of a turn in said momentum.

This can only explain what has happened since. The share price of Robinhood is now down more than 80 per cent from its high, and 60 per cent from the IPO price less than a year ago. There are no doubt a lot of “dip buyers” ruing their decision to buy in too soon in the collapse that has occurred.

The key drivers have been threefold. The first, a natural slowing in user growth, losing 100,000 in the third quarter, and the fact that the 22 million accounts have an average balance of US$5,000. The company is now facing a number of legal cases related to its forced decision to freeze activity in a number of stocks during the meme stock blowout and of course the slowdown in payment for order flow business.

Ultimately, the key driver appears to be the fact that many investors now have better things to do, like employment; with trading volumes per user falling 39 per cent, and resulting in a US$423 million quarterly loss. 

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.