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Kearns quickly asked for and received margin and option capabilities and his Robinhood account ballooned in size. Could someone please look into this? There was no better customer service mechanism in place, no telephone call… nothing! The entire customer experience was botched, and it represents a sad story of how rules should be in place to protect younger investors from making mistakes. Did Robinhood properly ask Kearns if he had the necessary experience to trade options?
Was Robinhood steering customers into options since those still generated excellent fees? We hope not, but there are lawsuits and regulations coming on this subject. Not all customers understand the risks associated with margin and options, so this capability needs to be closely watched. We worry that more and more Gen-Z investors that primarily open accounts at Robinhood are utilizing margin lending and complex options trading strategies.
One of our favorite metrics to follow is new client assets or net new assets coming into Schwab. This tends to tell us what market share or wallet share a firm is able to produce. If it is bringing in NNAs from retail accounts or through advisors, Schwab has a larger asset base to eventually monetize. Robinhood is not yet at the point where it is releasing NNAs, but Schwab is.
Over the next few pages, we will break down Schwab and Robinhood into various metrics — on an account basis. We want to understand the average account size. How much revenue or profits each funded account generates? Also, we can appreciate that Corporate Retirement accounts and Banking accounts tend to be much smaller than Brokerage accounts. As you can see in this Robinhood chart from its S-1 , funded accounts have steadily marched higher from to , but really began to explode higher in to In , Robinhood ended the year with This impressive growth can be attributed to adding products and services like crypto trading and fractional shares.
The key metric Robinhood investors appear to be enamored with is accounts. However, just as we mentioned, not all accounts are equal and as valuable as others. Robinhood Gold is their account that is offered in-depth research, instant access to deposits, as well as profitable margin lending. These are higher value clients, where Robinhood has the opportunity to generate more revenue per account.
Going forward, we would like to see Robinhood break out the number of funded accounts into Gold versus non-Gold accounts. While the account size is small today, Robinhood investors are betting on retention of these Gen-Z and Millennial customers, as well as good growth of assets per account. Also, we want to dissect the revenue per account. How does that compare to Schwab? There are material differences between retail versus advisor versus retirement accounts, but we will simply use their 36 million total accounts.
As we have stated several times, we tend to focus our attention on profitability, not just revenue. Schwab continues to post stellar profitability margins Adjusted Profit Margin Was it due to the remarkable growth in retail trading and meme stock popularity? Only time will tell if this is sustainable. Once again, we want to compare the profitability per account of Schwab versus Robinhood. Robinhood continues to grow impressively, especially on the new account front.
Is this growth coming from inexperienced, but engaged Gen-Z and Millennials? Is it being driven by meme stocks? As our research and survey concluded, Robinhood is mostly succeeding due to its excellent UI user interface and easy-to-use mobile-based trading platform. While this has been higher both absolute and relative to revenues , it is still a large amount of money. Does Robinhood plan on advertising more?
We believe that a publicly-held Robinhood will look to dramatically increase its marketing and TV spending. Also, running a brokerage firm can require costly infrastructure, real estate and operation costs. This is based off of million common shares, not including any possible underwriter purchases.
We are sure that Vlad does not want to repeat the late-January forced capital raise and clearing issues. With its IPO this week, we expect the share price to rocket higher. We anticipate the dozen or so sell-side analysts that will cover Robinhood will highlight the attractiveness of the mobile-based platform and the growing attractiveness to Gen-Z investors. We can appreciate the need to go out 5-plus years on Robinhood, but we think there is significantly more risk than reward on this story.
We think Robinhood has more downside risk than upside potential. We will now attempt to show you how we arrive at our price target. As we always do, we want to try and quantify our price target. This seems fair, but would still not provide much in terms of downside protection, in case PFOF gets banned.
Let us assume Robinhood can grow its That would have Robinhood exiting with nearly 30 million accounts. However, let us model in this improving scenario. Robinhood has done an admirable job of building out a trading platform, appealing to the growing Gen-Z and Millennial demographic. It seems to be genuinely interested in helping young people learn about savings and investing.
We are long-term investors, seeking companies that have both attractive fundamentals, as well as a compelling valuation. We do not believe that Robinhood can maintain this level of growth and we do not believe the valuation is terribly attractive either. Robinhood is at an interesting point in time. We expect its expenses will need to dramatically increase as it looks to market itself and build out its platform.
Robinhood has incurred operating losses in each year since its inception in and we struggle to see it turning truly profitable in the next 1 to 2 years. Not only has it been heavily fined, but Robinhood has 15 putative class actions filed against it. In , over 2, customer accounts were allegedly accessed by unauthorized users. Bullish investors will claim that these are natural growing pains for any firm, but it just highlights how much Robinhood needs to invest in its operations.
Unfortunately, these type of issues and negative publicity can offset all of the benefits of a great UI and mobile-based platform. If we were to identify our biggest worry, it would be revenue diversification. There is no way that Robinhood can begin to charge its customers for equity trading, to offset lost PFOF revenue. If the market corrects, experiences volatility or volumes decline, we believe Robinhood will underperform.
To state the obvious, we simply believe that Schwab or Interactive Brokers are better options for those seeking online brokerage exposure. In general: This disclaimer applies to this document and the verbal or written comments of any person representing it. The information presented is available for client or potential client use only. This summary, which has been furnished on a confidential basis to the recipient, does not constitute an offer of any securities or investment advisory services, which may be made only by means of a private placement memorandum or similar materials which contain a description of material terms and risks.
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I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Manole Capital Management 1. Schwab vs. Schwab Before we dive into Robinhood, we thought it would be helpful to do a detailed business breakdown of the online brokerage leader, Charles Schwab.
Revenue To start our analysis, we wanted to break down the business by revenue line item. Only time will tell… Assets As we discussed before, Schwab provides its retail or advisor customers a broad range of assets, across ETFs, equities, proprietary or 3rd party funds, and fixed income. Alex Kearns Most have heard the tragic story of year-old Alex Kearns, but we believe it is worth repeating. Profitability As we have stated several times, we tend to focus our attention on profitability, not just revenue.
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