Robinhood's regulatory troubles are just the tip of the iceberg

It’s easiest to blame Robinhood’s troubles on regulatory fallout, but its those troubles have obscured the larger issue: The company lacks an enduring competitive edge.


A crypto comeback might go a long way to help Robinhood’s revenue

Image: Olena Panasovska / Alex Muravev / Protocol

It’s been a full year since Robinhood weathered the memestock storm, and the company is now in much worse shape than many of us would have guessed back in January 2021. After announcing its Q4 earnings last night, Robinhood’s stock plunged into the single digits — just below $10 — down from a recent high of $70 in August 2021. That means Robinhood’s valuation dropped more than 84% in less than six months.

Investor confidence won’t be bolstered much by yesterday’s earnings results. Total net revenues dropped to $363 million from $365 million in the preceding quarter. In the quarter before that, Robinhood reported a much better $565 million in net revenue. Net losses were bad but not quite as bad as before: Robinhood reported a $423 million net loss in Q4, an improvement from the $1.3 billion net loss in Q3 2021. One of the most shocking data points: Average revenue per user dropped to $64, down from a recent high of $137 in Q1 2021. At the same time, Robinhood actually reported a decrease in monthly active users, from 18.9 million in Q3 2021 to 17.3 million in Q4 2021.

Cue the acquisition rumors. JPMorgan Chase would make a lot of sense as a buyer, as Protocol’s Fintech team explained earlier this week. Plenty of other consumer finance companies would welcome Robinhood’s 17.3 million monthly active users, many of whom are young and primed to gain in net worth.

Considering Morgan Stanley acquired E-Trade for $13 billion, Robinhood might look like a steal at its current market cap of around $9.7 billion. Remember: not so long ago, Robinhood traded around a $60 billion valuation. The stock performance has been so bad that Robinhood adjusted some employees' stock grants. The company's plummeting stock effectively gave recent hires a big pay cut. Robinhood also faces multiple class-action lawsuits alleging that it misled investors in its S-1 preceding the IPO.

It’s easiest to blame Robinhood’s troubles on regulatory fallout from the memestock debacle. Robinhood’s decision to freeze trading on meme stocks managed to both alienate consumers and draw intense regulatory scrutiny. Gary Gensler indicated in August that the SEC “could substantially limit or ban” the payment for order flow business model, which Robinhood uses to generate money. Critics worry the practice incentivizes trading platforms to entice frequent trading from their users. The clearing houses that purchase the orders also pay more for options orders, incentivizing trading platforms to steer consumers toward even riskier bets, but regulators haven’t made much progress on payment for order flow, and Robinhood’s stock and performance have continued to plunge.

Robinhood’s regulatory troubles have obscured the larger issue: The company lacks an enduring competitive edge. Commission-free trading was the key to Robinhood’s early success. But the incumbents have since caught up, and many offer commission-free trading without engaging in payment for order flow. Robinhood also inspired a bevy of new market entrants that are targeting niche audiences within the young trading cohort. For instance, — which doesn’t use payment for order flow — brands itself as a more accessible platform that will help build users’ financial literacy. And Robinhood’s attempts to expand its product in new directions aren’t creating a true competitive edge. Last week, for instance, Robinhood announced its crypto wallets beta program, but competitors such as Coinbase have had similar features for years. Similarly, Robinhood has tried to position itself as a finance super app, but so has just about every other consumer finance company.

Robinhood's short-term outlook hinges on the markets. A crypto comeback would go a long way toward boosting Robinhood’s revenue and lessening net losses in upcoming quarters. For the medium-to-long term, the path forward isn’t so clear. Robinhood outlined an uninspired 2022 roadmap that included plans for international crypto expansion and the development of spending and savings products. For the long term, Vlad Tenev seems to have done some soul searching: in reference to the memestock frenzy, he said “the Robinhood team has been thinking about it a lot.”

But that long-term plan seems to include a lot of wishful thinking. Tenev said on the call a lot of ex-Robinhood customers wanted to come back but “it wasn't as easy as it should have been for customers to come back to the platform.” Breakups are never easy.

A version of this story also appeared in today's Source Code newsletter; subscribe here.


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